With inflation still in focus, Fed minutes show openness to higher rates endgame

WASHINGTON, Feb 22 (Reuters) – Almost all Federal Reserve policymakers rallied behind a decision to cut interest rate hikes further at the U.S. central bank’s last policy meeting, but also indicated that curbing unacceptably high inflation would be a “key factor.” How much more should the price be raised?

In language suggesting a compromise between officials worried about a sluggish economy and those who believe inflation will hold, the Jan. 31-Feb. 1 meeting, policymakers agreed that rates should go higher, but a shift to smaller increases would allow them to be more closely calibrated to incoming data.

“Most all participants agreed that raising the target range of the federal funds rate by 25 basis points would be appropriate,” several said, adding that it would allow the central bank to “determine the size” of future increases. Published on Wednesday.

At the same time, “participants generally agreed that downside risks to the inflation outlook were a key factor shaping the policy outlook,” and that interest rates should be moved higher and “raised until inflation is clearly above 2%.”

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Only a “few” participants in the meeting either outright supported a large half-percentage-point increase or said they “might” support it.

The central bank offered 75-basis-point and 50-basis-point rate hikes in 2022 in a battle to contain inflation, which has soared to a 40-year high. The central bank’s policy rate is currently in the range of 4.50%-4.75%.

Describing inflation risks as “key” to policy in the minutes, the latest data – showing a slower-than-expected improvement – could signal a higher planned stopping point for the federal funds rate when policymakers release new projections at the end of March 21. 22 meeting, Inflation Intelligence chief Omair Sharif said.

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The latest inflation data and upward revisions to earlier figures mean the “upside risks to inflation” cited by policymakers in the minutes are clearly higher today than the last time the (Federal Open Market) Committee met, Sharif said. Policy Making Committee of the Central Bank. The average projected year-end policy rate could rise to 5.6%, compared to a “dot plot” projection of an average of 5.1% in December, with “March points moving higher.”

Bond yields rose and the US dollar advanced against a basket of currencies following the release of the minutes. US stocks saw modest gains.

The yield on the 2-year Treasury note, the government bond maturity most sensitive to Fed policy expectations, rose about 4 basis points to around 4.69% from its level before the release. The S&P 500 index (.SPX) closed lower, up about 0.25% before the minutes were released.

Futures traders tied to the Fed’s policy rate were included in bets on at least three quarter-percentage-point rate hikes in the upcoming meetings, with the contract price pointing to an upper federal funds rate range of 5.25%-5.50%.

Risk of recession

The minutes showed the Fed moving toward a possible end point for its current rate hikes, slowing down a more cautious approach to a potential stop point, while leaving open how higher rates could rise in the event that inflation does not ease.

The crowd’s reading, in particular, included notes pointed back and forth to sets of developments in the economy, which contributed to an even greater degree of uncertainty about where things were headed.

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“Some” participants saw a “high” chance of a U.S. recession this year and pointed to a drop in consumer spending toward the end of 2022, while others noted that households continue to sit on excess savings and some local governments. It also had “substantial budget surpluses” that would help stave off a painful recession.

Business investment was “repressed” at the end of the year. However, “a couple” of participants at the last Fed policy meeting said that businesses were “more optimistic” that supply constraints had been removed and that the global economic environment was improving and “support for U.S. end demand.”

The minutes said the labor market is hot as industries — at least outside the tech sector — are “keen to retain workers despite falling demand,” a factor that helps keep household incomes and spending under control.

A ‘too tight’ labor market

The central bank’s Feb. 1 policy statement said “ongoing increases” in rates would still be needed, but shifted the focus from the pace of upcoming hikes to their “magnitude,” as policymakers think they may be nearing a rate hike. Sufficient to ensure steady progress in reducing inflation.

Data from the last meeting showed the economy growing and adding jobs at an unexpectedly fast pace, while making little progress toward the central bank’s 2% inflation target. Inflation was two-and-a-half times the target in December, according to the central bank’s preferred measure, with January data due on Friday.

The minutes show that central bank officials are still attuned to the risk that they will need to do more to keep inflation at bay, which could lead to a more accurate view when policymakers meet when they release new interest rate and economic forecasts.

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“Participants agreed that the Committee has made significant progress over the past year in moving toward a more accommodative stance of monetary policy,” the minutes said, describing a continued growing economy amid a tight labor market.

“However, despite signs that the overall effect of the group’s tightening of monetary policy stance has begun to moderate inflationary pressures, participants agreed that inflation remained above the group’s long-term target of 2% and the labor market remained too tight.”

Report by Howard Schneider; Editing by Don Burns and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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