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Fed shifts into cautious policy mode as risks become more two-sided

Published Nov 21, 2023 06:14AM ET Updated Nov 21, 2023 04:31PM ET
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2/2 © Reuters. FILE PHOTO: The Federal Reserve building in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo 2/2
 
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By Howard Schneider

WASHINGTON (Reuters) -U.S. Federal Reserve officials agreed at their last policy meeting that they would proceed "carefully" and only raise interest rates if progress in controlling inflation faltered, the minutes of the Oct. 31-Nov. 1 gathering showed on Tuesday.

"All participants agreed that the Committee was in a position to proceed carefully," according to the minutes, which appeared to show support for more rate hikes dissipating within the U.S. central bank's Federal Open Market Committee, and the baseline shifting to one in which its benchmark overnight interest rate remains steady absent a bad inflation surprise.

Inflation has been slowing - consumer prices did not rise at all on a month-to-month basis in October - and while the Fed has not declared its fight against rapid price increases over, the tenor of the discussion has been shifting towards a focus on how long to keep the policy rate in the current 5.25%-5.50% range.

"Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee's inflation objective was insufficient," said the minutes, a statement that indicated it will take an unexpected shock of some degree to prompt a further rate increase.

That sentence did not appear in the minutes of the Fed's prior meeting in September, when "a majority of participants" still judged that another rate increase would be needed in a tightening cycle that has pushed the policy rate 5.25 percentage points higher in the past 20 months.

The latest policy meeting readout, by contrast, said that "all participants judged it appropriate to maintain" the current rate setting, a stance that will be clarified at the Fed's Dec. 12-13 meeting when policymakers issue a new set of detailed projections for interest rates and the economy.

The document drew little reaction in financial markets, largely affirming the view that the Fed is done raising rates but won't explicitly say so until more officials become convinced inflation won't rebound.

Contracts tied to the federal funds rate continued to show a near-zero probability of further increases. Odds of a rate cut at the Fed's April 30-May 1, 2024 meeting rose slightly to roughly 60%, from about 57% before the release of the minutes, according to the CME Group's (NASDAQ:CME) FedWatch Tool.

U.S. stocks added slightly to losses and closed lower following the release of the minutes, while the U.S. dollar edged higher against a basket of currencies. U.S. Treasury yields slipped.

The minutes showed U.S. central bank policymakers wrestling with conflicting economic signals that have made risks to the economy "more two-sided," with rekindled inflation still a concern, but worries as well about clamping down on credit too far and damaging the economy's prospects.

U.S. economic growth had just registered an outsized 4.9% annualized gain in the third quarter, a seemingly inflationary pace. But financial markets had driven interest rates higher for households, businesses and the U.S. government, threatening to curb economic and job growth more than might be necessary to return inflation to the Fed's 2% target.

"Participants commented on the significant tightening in financial conditions in recent months, driven by higher longer-term yields," the minutes said.

Still, inflation "remained well above" the central bank's target, likely requiring Fed policy "to remain at a restrictive stance for some time until inflation is clearly moving down sustainably."

"The overall tone of the FOMC minutes was cautiously hawkish - the commitment to remaining in restrictive territory for 'some time' was the clearest takeaway," said Ian Lyngen, strategist with BMO Capital Markets.

NO VICTORY DECLARATION

Fed Chair Jerome Powell had made liberal use of the "careful" concept at his last press conference in describing the central bank's efforts to balance still-elevated inflation with a sense the economy was about to slow.

There's good reason to be cautious, with the Fed possibly on the verge of pulling off the unexpected by navigating out of the worst inflationary surge in 40 years without doing major damage to the economy.

A New York Fed staff study released on Tuesday suggested in fact that the U.S. central bank's late start in raising interest rates, with the first hike coming a year after prices began a sharp rise, allowed the economy to bank more growth with the same progress on lowering inflation than would have been the case if rate increases had started sooner.

There's little appetite among policymakers, however, to declare victory yet, or to give investors much direct guidance about what will happen next.

"Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so," Powell said at an International Monetary Fund research conference earlier this month. "We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of over-tightening."

Fed shifts into cautious policy mode as risks become more two-sided
 

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Comments (6)
Mark Manley
Mark Manley Nov 21, 2023 1:48PM ET
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These Fed governors are so naive its laughable, why a goal of 2% when the average yearly inflation for the last 50 years is over 3.5% and for the last 20 years is over 2.5%, average yearly inflation during my lifetime has been over 3%, so why the unrealistic, ultra-low goal? And why aren't the financial geniuses out there challenging this?
First Last
First Last Nov 21, 2023 1:48PM ET
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Look at the US average inflation rate & average GDP growth rate between the GFC & covid pandemic.
michel bovy
michel bovy Nov 21, 2023 1:48PM ET
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Fed and other crooked authorities have been lying for 50 years.... Inflation is a Hidden Tax...! Nothing else, this is why They love it!!!!
First Last
First Last Nov 21, 2023 1:48PM ET
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michel bovy   US stock market has been a good investment to hold for the last 50 years, rising more than inflation.
Nov 21, 2023 1:48PM ET
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Likely to manipulate usd down and index up correct
First Last
First Last Nov 21, 2023 1:48PM ET
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USD is up & stock indices are down today.
Dean SP
Dean SP Nov 21, 2023 1:09PM ET
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What a manipulated bunch of frauds rule the consciences of mankind...
girish rane
girish rane Nov 21, 2023 1:00PM ET
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Why the statements are contradictory in policy meet & IMF speech by FED chief, we don't know
Casador Del Oso
Casador Del Oso Nov 21, 2023 11:04AM ET
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The minutes will be interpreted as dovish by those who are paid to give a bullish outlook.
Stephen Fa
Stephen Fa Nov 21, 2023 11:04AM ET
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Casador is talking about all the mainstream media executives on CIA payroll now as the program started about 10/years ago.
Angus Malarkey
Angus Malarkey Nov 21, 2023 10:51AM ET
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The Fed creates inflation, then pretends to fight it resulting in economic hardship allowing wealth transfer from middle class to banksters.END THE FED.
trevor hron
trevor hron Nov 21, 2023 10:51AM ET
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Sounds good to me. We definitely need less government anyway. They’re way too expensive.
 
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