Fed Focused on Controlling Inflation: Fed Minutes

The US Federal Reserve emphasized its firm commitment to return inflation to its 2% target, according to the central bank’s minutes.

The minutes of the December meeting, which were released on Wednesday, showed that policymakers were still focused on controlling the pace of price increases that threatened to be more intense than anticipated, and were concerned about any “perceptions mistaken” in financial markets that their commitment to fighting inflation was waning.

“Several participants emphasized that it would be important to clearly communicate that a slowdown in the rate increase pace was not an indication of a weakening of the Committee’s resolve to achieve its price stability objective,” the minutes read.

Officials acknowledged that they made “significant progress” last year in raising interest rates enough to reduce inflation.

As a result, the central bank now needed to balance its fight against rising prices with the risks of slowing the economy too much and “potentially placing the greatest burdens on the most vulnerable groups” through higher-than-necessary unemployment.

“Most participants emphasized the need to maintain flexibility and optionality when shifting policy to a more restrictive stance,” the minutes showed, indicating that officials may be prepared to cut increases to a quarter of a percentage point. in the first meeting of the year, but also remained open at an even higher than anticipated “terminal” rate if high inflation persists.

Continue the fight against inflation

Policymakers approved a half percentage point rate hike at last month’s meeting, a step back from the three-quarter percentage point hikes used for much of 2022.

No participant anticipated that it would be appropriate to begin lowering the federal funds rate in 2023,” the minutes read.

However, markets and some economists have yet to abandon the idea that the Fed will do exactly that before the end of the year, reinforcing the communication challenge facing Fed Chairman Jerome Powell and his colleagues this year.

Fed officials projected in December that the rate, currently in the 4.25-4.50% range, would rise to just over 5% by the end of 2023 and likely stay there for some time.

How long “tight” monetary policy will be needed could become an emerging topic of debate.

The US economic outlook presented by Fed staff at last month’s meeting suggested that the battle to lower prices may last longer than anticipated.

“Many participants highlighted” that the Fed, after a year in which it tightened monetary policy at the fastest pace since the 1980s, now had to balance its fight against inflation with the possibility of policy overreach that “could end up being more restrictive than necessary.”