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The Fed minutes could signal the end of the rate hike game, a new phase in the debate
Investing.com – The Federal Reserve ended 2022 by emphatically promising at its December monetary policy meeting that rates would continue to rise this year, but at a slower pace and perhaps only another three-quarters of a percentage point.
That session, scheduled for release at 2pm. Wednesday’s EDT (1900 GMT) could provide insight into the end of the current tightening cycle, as well as how deeply US central bank officials weigh the risks to economic growth against their greater concern about inflation.
New data released Wednesday provided little indication that the U.S. job market is starting to slow in the way Federal Reserve officials hope will allow inflation to ease without significant job losses. The number of job vacancies changed little in November, remaining elevated relative to the number of job seekers, a figure highlighted by Fed Chair Jerome Powell as a sign of continued rapid wage increases that could fuel inflation going forward .
The Labor Department is due to release its December jobs report on Friday, ahead of the release of its latest consumer price inflation data next week, both important benchmarks the Fed relies on when planning its next move.
The tone of the next meeting’s minutes is likely to indicate that inflation is still at the heart of the discussions of policy makers meeting on 13 and 14 December. The pace of price hikes slowed for several months, but as of November, the Fed’s favorite measure of inflation — the Personal Consumption Spending Price Index — continued to rise at an annualized rate of 5.5 percent , more than double the Fed’s 2% target.
In an article published Wednesday, Minneapolis Federal Reserve Bank President Neel Kashkari said he believes interest rates need to rise slightly above what most of his peers expect and that rates will rise further if he doesn’t slow down. as expected.
Kashkari, who said he sees a possible deadlock for the federal funds rate at around 5.4% this year versus the 5.1% average expected for 2023 by all 19 Fed officials, wrote: “It would be appropriate to continue to raise interest rates.” At least in the next few meetings until we are sure that inflation has peaked and any sign of slow progress that keeps inflation high for a while will, in my view, ensure likely rate hikes to much higher levels.” .
At its December meeting, the Fed raised the federal funds rate by half a percentage point, bringing it to a range of between 4.25% and 4.50%.
risk perception
While there is near unanimity for expectations for next year, projections for 2024 differ widely, with one Fed official seeing the interest rate remain at 5.625%, another seeing it fall to 3.125% and no more. of seven officials agree on something specific about the Fed’s interest rate. An economy that is still trying to escape a recession or is reeling.
By showcasing the different viewpoints and approximate size of the policy-making groups, the minutes can show that the Fed’s internal deliberations are entering a new phase in which risks to economic growth and jobs are being given more weight and expressed a wider range of views on the alternatives needed to further reduce inflation.
Derek Tang, economist at LH Meyer, wrote Tuesday that the Fed “seems united on a rate hike above 5%, but completely divided on exit strategy from the tightening cycle; how long to keep rates high and how deep and quick should be the slack “on the other side”.
The minutes can also help see how much sentiment tends to moderate the pace of upcoming interest rate hikes by a quarter of a percentage point from January 31 through February. The first meeting is a way to weigh the many risks the Fed could face this year if inflation continues to fall and the economy continues to slow.
The Fed had planned several three-quarters of a percentage point hikes for most of 2022, but trimmed that hike to half a percentage point in December and indicated it could slow the pace further.
Although Fed Chairman Jerome Powell stressed in December that the central bank would do whatever it takes to keep inflation in check, he also said officials recognize the risks of being too aggressive, which Fed staff have also started to underline.
In minutes of their Nov. 1-2 meeting, Fed officials expressed roughly even odds of a recession in 2023, and late last month new research warned that with the world’s major central banks rising simultaneously interest rates, could be The combined effect is greater than expected, as fiscal policy in one country affects bond yields, currency values and business patterns in another.
Fed economists Dario Caldara, Francesco Ferrante and Albert Keralto wrote: “Estimating spillovers is particularly difficult and there are concerns that policymakers may underestimate it. In such a situation, there is a risk of excessive tightening that banks power plants will have to keep an eye out for.” We think they know.”
