Federal Reserve officials at their most recent meeting expressed little appetite for cutting interest rates anytime soon, particularly as inflation remains well above their goal, according to minutes released Tuesday.
The summary of the meeting, held Oct. 31-Nov. 1, showed that Federal Open Market Committee members still worry that inflation could be stubborn or move higher, and that more may need to be done.
At the least, they said policy will need to stay “restrictive” until data shows inflation on a convincing trek back to the central bank’s 2% goal.
“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time,” the minutes said.
Along with that, however, the minutes showed that members believe they can move “proceed carefully” and make decisions “on the totality of incoming information and its implications for the economic outlook as well as the balance of risks.”
The release comes amid overwhelming sentiment on Wall Street that the Fed is done hiking.
Traders in the fed funds futures market are indicating virtually no probability that policymakers will increase rates again this cycle, and in fact are pricing in cuts starting in May. Ultimately, the market expects that the Fed will enact the equivalent of four quarter percentage point cuts before the end of 2024.
However, the minutes gave no indication that members even discussed when they might start lowering rates, which was reflected in Chairman Jerome Powell’s post-meeting news conference.
“The fact is, the Committee is not thinking about rate cuts right now at all,” Powell said then.
The fed’s benchmark funds rate, which sets short-term borrowing costs, is currently targeted in a range between 5.25%-5.5%, the highest level in 22 years.
The meeting occurred amid market worries over rising Treasury yields, a topic that appeared to generate substantial discussion during the meeting. The same day, Nov. 1, when the Fed released its post-meeting statement, the Treasury Department announced its borrowing needs over the next few months, which actually were a bit smaller than markets had anticipated.
10-year Treasury yield, 3 months
Since the meeting, yields have receded off 16-year highs as markets digest the impact of heavy debt-fueled borrowing from the government and views over where the Fed is headed with rates.
Officials concluded that the rise in yields had been fueled by rising “term premiums,” or the extra yield investors demanded to hold longer-term securities. The minutes noted that policymakers viewed the rising term premium as a product of greater supply as the government finances its huge budget deficits. Other issues included the Fed’s stance on monetary policy and views on inflation and growth.
“However, they also noted that, whatever the source of the rise in longer-term yields, persistent changes in financial conditions could have implications for the path of monetary policy and that it would therefore be important to continue to monitor market developments closely,” the minutes said.
In other business, officials said they expect economic growth in the fourth quarter to “slow markedly” from the 4.9% increase in Q3 gross domestic product. They said that risks to broader economic growth are probably skewed to the downside, while risks to inflation are to the upside.
As for current policy, members said it “was restrictive and was putting downward pressure on economic activity and inflation,” the minutes said.
Public remarks from Fed officials have been split between those who think the central bank can hold here while it weighs the impact that its previous 11 hikes, totaling 5.25 percentage points, have had on the economy, and those who believe more increases are warranted.
Economic data also has been split, though generally favorable for inflation trends.
The Fed’s key inflation indicator, the personal consumption expenditures price index, showed core inflation running at a 3.7% 12-month pace in September. The number has improved considerably, dropping a full percentage point since May, but is still well above the Fed’s target.
Some economists think getting inflation down from here could be tricky, particularly with wage increases running strong and more stubborn components such as rent and medical care elevated. Indeed, so-called sticky prices rose 4.9% over the past year, according to an Atlanta Fed gauge.
On employment, perhaps the most critical factor in getting inflation lower, the jobs market is strong though moderating. Nonfarm payrolls increased by 150,000 in October, one of the slowest months of the recovery, though the unemployment rate has climbed to 3.9%. The half percentage point increase of the jobless rate, if it persists, is commonly associated with recessions.
Economic growth, after a robust first three quarters in 2023, is expected to slow considerably. The Atlanta Fed’s GDPNow tracker is pointing to growth of 2% in the fourth quarter.
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