Fed wants ‘more evidence’ of slowing inflation and supports fresh rate hikes

Federal Reserve officials warned they need to see “considerably more evidence” of easing inflation before being confident that price pressures are under control as they support renewed rate hikes this year, according to a report from their last meeting.

Minutes after the December meeting, when the US Federal Reserve raised interest rates by half a percentage point, showed that the Fed intends to keep the economy under pressure to try to combat price pressures, which they warned are increasing it “could prove more persistent than expected”. .

The half-point rise ended a month-long streak of 0.75 percentage point hikes and lifted the federal funds rate target range to 4.25 percent to 4.5 percent.

December’s decision followed fresh evidence that US inflation appeared to have peaked as energy prices and those tied to the commodity sector fell, developments that participants described as “welcome”.

“Participants generally noted that a hawkish policy stance would need to be maintained until incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which would likely take some time,” it said on Wednesday published minutes, which relates to the Fed’s inflation target.

The transcript also showed that officials are very attuned to how their policy communications are processed by investors and others on Wall Street. In the weeks leading up to the December meeting, financial conditions had eased as fed funds futures traders bet the Fed would end its tightening campaign sooner than officials had signaled.

A slower pace of rate hikes “did not indicate a weakening of the committee’s determination to achieve its price stability target or a judgment that inflation was already on a sustained downward path,” several participants said, according to the minutes.

Officials also warned that “unwarranted loosening of financial conditions, particularly if caused by a misperception of the public’s perception of the Committee’s responsiveness function, would complicate the Committee’s efforts to restore price stability”.

According to the “dot plot” of policymakers’ interest rate projections released after the meeting, most officials now see the Federal Funds Rate peaking at between 5 percent and 5.25 percent, with a large cohort believing it may need to be offset higher . This suggests that rate hikes totaling at least 0.75 percentage points are still ahead.

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At the press conference following last month’s interest rate decision, Fed Chair Jay Powell warned that he could not say “with confidence” that the central bank would not be raising its estimates again, as he tried to quell speculation that it would tighten soon would give up plans.

“We have achieved a lot and the full impact of our rapid tightening has yet to be felt. We still have work to do,” he told reporters.

The dot chart showed that rate cuts are not expected until 2024, when the policy rate is expected to fall to 4.1 percent before falling to 3.1 percent in 2025. Growth is expected to slow significantly as borrowing costs are kept elevated for an extended period, with most officials forecasting expansion of just 0.5 percent this year before a 1.6 percent recovery in 2024.

The unemployment rate is likely to rise almost a full percentage point to 4.6 percent from its current level, the estimates show.

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While the sluggish economy will put downward pressure on prices, it may take some time for inflation to fall to the Fed’s long-term target of 2 percent. The central bank’s preferred measure of inflation — the core price index of personal consumption spending — is set to fall to 3.5 percent by the end of 2023 and 2.5 percent in 2024. In November it was 4.7 percent.

So far, the Fed’s tightening has been felt most strongly in rate-sensitive sectors like housing, where prices have fallen dramatically since their peaks in the coronavirus pandemic. However, demand for labor remains high as consumers continue to spend, which is helping to further entrench inflationary pressures that have spread across the service sector. Economists warn it will take a recession and job losses to eradicate them.

Powell and his colleagues, as well as White House officials, claim that a recession can be avoided even if the unemployment rate rises.

https://www.ft.com/content/f2a12a8a-fa88-4b02-abe0-647664dfe038 Fed wants ‘more evidence’ of slowing inflation and supports fresh rate hikes

Adam Bradshaw

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