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Federal Reserve shows cautious approach in raising rates to combat inflation: minutes

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Federal Reserve officials agreed at their last monetary policy meeting that they could take a cautious approach to raising interest rates in the future, and would only need to raise them “if” incoming data showed insufficient progress in reducing the rate. inflation.

“All participants agreed that the (Federal Open Market) Committee was in a position to proceed carefully,” according to minutes of the Oct. 31-Nov. 31 meeting. 1 session that were released on Tuesday.

“Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee’s inflation target was insufficient,” the minutes said.

The minutes showed central bank policymakers grappling with conflicting economic signals in a meeting where they ended up holding the benchmark overnight interest rate steady at the current range of 5.25%-5.50%.

U.S. economic growth had just posted a whopping 4.9% annualized gain in the third quarter, a seemingly inflationary pace of growth. But financial markets had raised interest rates for households, businesses and the U.S. government, threatening to slow economic and job growth more than necessary to return inflation to the Federal Reserve’s 2% target.

Minutes from the Federal Reserve’s latest meeting showed central bank policymakers grappling with conflicting economic signals.
AFP via Getty Images

“Participants commented on the significant tightening of financial conditions in recent months, driven by higher long-term yields,” the minutes said.

Still, inflation “remained well above” the central bank’s target, likely requiring Fed policy to “remain on a tight stance for some time until inflation is clearly declining sustainably.”

The minutes, which set conditions around the need for further rate hikes and focus more on how long it may be necessary to maintain the current policy rate, signal a major shift in the Federal Reserve’s policy dialogue.

Federal Reserve Chairman Jerome Powell made liberal use of the concept “careful” in his latest press conference in describing the Fed’s efforts to balance still-elevated inflation with tighter credit conditions and a sense that the economy was about to slow down.

Policymakers have generally supported that approach at a time when they seem unlikely to raise the target interest rate further, but they are reluctant to say so while inflation, at 3.4% by the Fed’s preferred measure, remains very high. above the central level. bank’s objective.


Federal Reserve Chairman Jerome Powell
Federal Reserve Chair Jerome Powell is trying to balance still elevated inflation with tightening credit conditions and a sense that the economy is about to slow.
REUTERS

No declaration of victory

There is good reason to be cautious, as the Federal Reserve is possibly on the verge of achieving the unexpected by emerging from the worst inflation surge in 40 years without causing major damage to the economy.

TO New York Federal Reserve Staff Study published on Tuesday in fact suggested that the late start of the US central bank’s increase in interest rates, with the first increase a year after prices began a sharp rise, allowed the economy to accumulate more growth with the same progress in reducing inflation as would have been the same if rate increases had started earlier.

However, there is little appetite among policymakers to declare victory yet or to give investors much direct guidance on what happens next.

“Inflation has given us some lies. 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. “However, we will continue to exercise caution, allowing us to address both the risk of being misled by a few good months of data and the risk of over-adjustment.”

Most investors, however, believe the Federal Reserve is done raising rates. Contracts linked to the benchmark overnight federal funds rate show a near-zero chance of further increases. Ahead of the minutes’ release, the CME Group’s FedWatch tool put the odds of a rate cut at around 57% for the Fed’s April 30-May 1, 2024 policy meeting.

The minutes did not address that possibility, and officials insisted they are still not entirely sure the policy rate is “sufficiently restrictive” to end the fight against inflation.

Fed officials have said publicly that their decision on how long to keep the current rate intact will depend on how inflation behaves, with continued progress toward the 2% target being the necessary condition for any change.

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