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Fed minutes show inflation resolution and concerns over market sentiment

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(Bloomberg) – Federal Reserve officials last month affirmed their determination to bring inflation down and, in an unusually blunt warning to investors, warned against underestimating their determination to hold interest rates down. high interest for a while.

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At the start of the meeting, markets were pricing in interest rate cuts in the second half of 2023.

Fed officials noted that “unwarranted easing of financial conditions, particularly if driven by a public misperception of the committee’s reaction function, would complicate the committee’s efforts to restore price stability. according to the minutes of the December 13 meeting of the Federal Open Market Committee. -14 meeting released in Washington on Wednesday.

US stocks pared gains following the report, as the Fed’s policy-sensitive two-year Treasury yield rose and the dollar remained lower.

U.S. central bankers raised the benchmark lending rate by half a percentage point during their rally, slowing after an aggressive run of four consecutive 75 basis point increases. Officials also released new forecasts that showed a hawkish tilt with more hikes expected in 2023 than investors expect.

“They don’t see the light at the end of the tunnel with inflation yet,” said Derek Tang, economist at LH Meyer in Washington. “They are so intent on ‘unwarranted’ financial easing that the scale is expected to tilt to stay at 50 basis points in February. This will get the message home.

The minutes showed that Fed officials intended to bring inflation back toward their 2% target at the risk of rising unemployment and slowing growth.

“Several participants noted that the medians of participants’ assessments for the appropriate path of the federal funds rate in the summary of economic projections, which notably tracked above market-based measures of policy rate expectations, underscored the committee’s strong commitment to bringing inflation back to its 2% target,” the minutes read. No official rate cut expected in 2023.

The Fed’s decision last month extended its most aggressive tightening cycle since the 1980s. Starting from near zero in March, authorities raised their benchmark lending rate in successive meetings to a target range from 4.25% to 4.5%, the highest since 2007.

‘No more work’

Still, Chairman Jerome Powell told a news conference after the meeting that the committee had “more work to do,” explaining how high rates eventually rise and how long the Fed keeps them going. were more important than the rate at which officials achieve it. destination.

He also described the labor market as “unbalanced” and “extremely tight”, and warned that restoring stable prices would likely require some “easing” of labor market conditions.

A report released earlier on Wednesday showed job openings – a key metric for Powell – were little changed at a high level in November. According to economists polled by Bloomberg ahead of Friday’s monthly jobs report, payrolls in the United States are expected to have risen by 200,000 in December.

Quarterly economic estimates updated by Fed officials last month showed rates rising to 5.1% this year, according to their median projection, from 4.6% in the previous round of forecasts in September.

Fed staff said the possibility of a recession was “a plausible alternative to the benchmark outlook” for slow economic growth for 2023.

Downside risks

“Slow growth in real private domestic spending expected over the next year, a lackluster global economic outlook and still tight financial conditions were seen as tipping downside risks around the baseline projection for activity. real economy,” they said.

Seventeen of the 19 officials expected rates at or above 5.1% this year. By comparison, not a single Fed official in September had forecast rates above 5% in 2023.

Policymakers will then meet on January 31 and February 1. Prior to Wednesday’s minutes, futures markets were pricing in an increase of at least a quarter of a percentage point.

The minutes indicate that the managers will decide “meeting by meeting” on the rates.

The more restrictive policy stance is expected to push the unemployment rate to 4.6% by the end of the year, from 3.7% in November, according to the Fed’s latest projections.

Their forecast also showed a higher median estimate for underlying inflation of 3.5% in 2023, around a full percentage point lower than November’s reading of 4.7% for the price index. basic personal consumption expenditure.

–With help from Ana Monteiro and Steve Matthews.

(Adds Economist’s comment to sixth paragraph.)

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