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Fed backs higher for longer rates to tackle 'unacceptably high' inflation

Published 01/04/2023, 02:10 PM
Updated 01/04/2023, 02:12 PM
© Reuters

© Reuters

By Yasin Ebrahim

Investing.com – Federal Reserve policymakers agreed that a sustained period of restrictive policy would be needed to cool "unacceptably high" inflation, according to the minutes of the Fed's December meeting released on Wednesday. 

Fed members favored a "restrictive policy stance for a sustained period," the minutes showed, until inflation was on a sustained downward path to 2 percent, which was likely to take "some time."  

At the conclusion of its previous meeting on Dec. 14, the Federal Open Market Committee raised its benchmark rate by 0.5% to a range of 4.25% to 4.5%.

The Fed's policy decision in December marked a slowdown from the four consecutive 0.75% rate increases seen at the prior meetings. Despite a willingness to move at a slower pace of hikes, Fed members at the meeting backed the need to raise interest rates further, upgrading their forecast on the peak level of rates, or the terminal rate.

Members viewed that a higher for longer rate regime would keep a lid on economic growth and curb inflation, which remains "unacceptably high," according to the minutes. 

At the meeting, Fed members estimated a median rate of 5.1% in 2023, up from a prior forecast of 4.6%, suggesting a target range of 5%-5.25%, or about another 75 basis points of rate hikes ahead. 

The more aggressive rate-hike outlook from the central bank arrived as Fed members prepared for an even faster pace of inflation, raising their outlook on price pressures to 3.5% in 2023, up from a prior forecast of 3.1%.

Debate among Fed members focused on two risks: the risk of pausing too early, which would threaten the central bank's aim of bringing inflation down to its 2% target, and the risk of tightening too much, pushing the economy into recession. 

"Many participants highlighted that the Committee needed to continue to balance two risks. One risk was that an insufficiently restrictive monetary policy could cause inflation to remain above the Committee's target for longer than anticipated, leading to unanchored inflation expectations...[T]he other risk was that the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent."

Ultimately, the committee members, however, continued to view the inflation outlook as a "key factor shaping the outlook for policy," the minutes showed.    

Earlier on Wednesday, Minneapolis Federal Reserve President Neel Kashkari said while there were signs of easing inflation, the Fed still has more work to do.

"[I]t will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked," Kashkari said, forecasting a Fed pause at about 5.4%.

“I have us pausing at 5.4%, Kashkari said, though added that any risk to inflation remaining higher for longer will “warrant, in my view, taking the policy rate potentially much higher.”

The latest data pointing to a still-tight labor market, which threatens to further fuel wage growth and inflation, outlined the need for the Fed to continue tightening monetary policy.

U.S. job openings, a gauge of labor demand, fell less than expected in November to 10.458 million from 10.512 million in October, according to the Bureau of Labor Statistics.

“The JOLTS report was very strong, showing no improvement in the labor imbalance,” Jefferies said in a note. “Without a substantial reduction in labor demand, the Fed will not be comfortable pausing, let alone cutting rates.”

Fed members expect, however, that under an "appropriately restrictive path of monetary policy," labor market supply and demand would "come into better balance over time, easing upward pressures on nominal wages and prices," the minutes showed.

About 84% of traders expect the Fed to lift rates by 0.25% at its next meeting on Feb. 1, according to Investing.com’s Fed Rate Monitor Tool

“We continue to expect three additional 25bp rate hikes in February, March, and May, for a peak funds rate of 5-5.25%,” Goldman Sachs said in a recent note ahead of the FOMC minutes.

The Fed also flagged the recent easing financial conditions, if driven by market expectations for rate a cut, as a concern and said no rate cuts were expected this year. 

"No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023," according to the Fed minutes. 

Latest comments

That’s right poor people the money supply gets doubled and you get higher interest lol
Has anyone at the fed taken an Econ class? Today’s inflation isn’t solvable with monetary policy; we need fiscal policy tools. Too few people making stuff, too many people with steady incomes and no jobs wanting stuff. Raising interest rates has succeeded only in shifting spending away from durable goods (which have high us-made content) to consumption goods (much of which we import). Stop trying to turn screws with a hammer.
it's all lip service and unfortunately if the majority of people haven't taken econ either, they keep believing the political theater.
nice 👍
is the decision made by 2022 members or 2023 new members?
The fed is an amazing group. They got it ALL wrong before inflation blew up in our face. And now they have no credibility.
They are a bunch of hacks and that won't be heald accountable. My opinion is they did it on purpose to transfer wealth to the rich and then saddle the middle class with the bill.
"unacceptably high inflation " that they caused.
It should be investigated whether there is a conspiracy to keep the market at lows and not letting it recover for a substantially long period, so that entry in various emerging markets is taken at low rates
please review Shiller PE ratio
OPINION: inflation has escaped and there is no return, recession and hunger follow, impoverishment of the citizens, also the dollar as bank notes, printed on paper is over with the US debt excluded from being serviced, next, USA must be considered bankrupt states, etc., for the USA to get out of debt and dissolution, the only way is the adoption of online electronic money, very quickly, i.e ...yesterday.!!!
You misspelled your user name.
Money is already online and electronic
Lets not forget its the FED and CBs that caused inflation by increasing the $ and credit supply. They can 'pretend' to fight something they created but Inflation is a deliberate stealth tax so don't expect the fighting to be too severe.. lol
and the markets don't care
seriously
Strong 💪 USD as goods for China 🇨🇳 Sellers 🇺🇸✌️💯
Week USD less purchase power for US workers.
USD will eventually go cliff diving without a parachute
Anyone surprised? This has been foretold in December.
Well I am sure it has nothing to do with the 1.7 trillion Woke Bill that was just passed. No way that will add to inflation of course.
But people here have been blaming everything on Biden, so they're saying none.
 "stick to politics"  --  You're blind if you really saw nothing political about Mojo's post.
* so they're saying none are caused by Putin
Will the crude oil market go up?
yes.  And also down.
When markets don't go down on news like this, you know we are near the bottom and it's time to buy.
Exactly! It's not news anymore. The longer they keep saying these things, the more it becomes a given. That means less uncertainty and therefore markets will start going up.
the markets don't believe in the feds commitment. balance sheet run off to slow and never going to shrink a significant amount before it heads higher.
"Not news" is generally bullish
God bless US, Fed almost gona kill US economy n bring Great recession of all time.
there is still way to much money out there. We haven't even chipped the iceberg
Buddah too
  "add up the back log of inflation from the past decade" --  Inflation (and increase in moeny supply) has pretty much been happening everywhere all the time.  What have been new are the pandemic & Russian aggression.
Good. Because hopefully they go too fast and we have deflation. 2% target does nothing. need 1% or less for a long time to smooth out over 2020 to say 2030 range.
that will never happen
Same folks who spouted “transitory” while the whole calamity unfolded under their watch.
It is funny that the same people who said inflation was transitory now 100% believe there is no way inflation could fall faster than they think.
"the whole calamity" is transitory, as are Putin and Xi.
it won't fall enough without a disaster. Behind the scenes things a starting to crumble
India market up ya down sir
Down
This website blows. Either too many bots posting garbage or the filtering on comments is too restrictive. You'd think that with a paid subscription service they could afford better AI to moderate comments.
agreed. they won't do a thing about the bots because the bots are paying the site. pathetic.
exactly
Gee, the Fed (Powell), has been saying this consistently for months. And the markets are surprised??
No me
no me? you're surprised?
will market fall??
Yes.  It will also rise.
So, not news.
When is it okay to make a innocent person responsible for an entire countries bad habits in collecting debt? When they got authority, that's when. This is your debt and you continue to run it in the mud 10 fold. I am not a slave. So make the ones stealing make it for you.
What? You sound angry about something.
Funny how market still green.
only because they spent so morning pumping it 6 points ($SPY), so there was more room
Funny how people think the minutes are some unknown that should move the market.
actually the minutes are unknown until they are released nearly a month after the meeting. The minutes can move markets because the minutes provide detailed information from each board member that might not be clear when Powell gives his speech following the meeting. For example, he might be hawkish while the minutes provide evidence done of the members are dovish.
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