Fed minutes showed officials feeling better about inflation

Federal Reserve officials wanted to use their final policy statement of 2023 to signal that interest rates may be at their peak even as they left the door open to future rate hikes, minutes from their December meeting showed.

The notes, released Wednesday, explained why officials adjusted a key phrase in that statement — adding “any” to the sentence that promised officials would work to “determine the extent of any additional policy reinforcements that might be appropriate ‘ to gauge. The point was to convey the assessment that policy was “probably now at or near its peak” as inflation moderated and higher interest rates appeared to be working as planned.

Federal Reserve officials left rates unchanged in their Dec. 13 policy decision and predicted they would reduce financing costs three times in 2024. Both the meeting itself – and the new minutes detailing the Fed’s thinking – have suggested that the central bank is moving to the next phase in its battle against rapid inflation.

“Several participants noted that the Committee’s previous policy actions had the intended effect of helping slow aggregate demand growth and cooling labor market conditions,” the minutes said at another point. Given that “they expected the Committee’s restrictive policy stance would continue to soften household and business spending, contributing to a further decline in inflation in coming years.”

The Fed quickly raised rates starting in March 2022, hoping to slow economic growth by making it more expensive for households and businesses to borrow money. The economy has remained surprisingly resilient despite these moves, which have pushed interest rates to their highest level in 22 years.

But inflation has cooled sharply since mid-2023, with Fed-favored price increases rising 2.6 percent over the year through November. While that is still faster than the central bank’s inflation target of 2 percent, it is much more moderate than the central bank’s inflation target 2022 peak, which was higher than 7 percent. That has allowed the Fed to steer away from rate hikes.

Officials previously expected to make one final quarter-point move in 2023, but they ultimately skipped it. Now Wall Street is focusing on when they will start cutting rates, and how quickly they will cut them. Although rates are currently set at a range of 5.25 to 5.5 percent, investors bet that they could fall to 3.75 to 4 percent by the end of 2024, based on market prices before the minutes were released. Many expect tariff reductions to start as early as March.

But Fed officials have suggested they may need to at least keep rates high enough to dampen growth for some time. Much of the recent progress has come as supply chain issues have been resolved, but further slowdowns could require a pronounced economic slowdown.

“Several participants felt that the recovery in supply chains and labor supply was largely complete, and that continued progress in reducing inflation may need to come primarily from further softening of product and labor demand, with restrictive monetary policy continues to play a central role.” the minutes said.

Other parts of the economy are showing signs of slowing. While growth and consumption have remained surprisingly solid, employment has declined. Job openings fell in November to the lowest level since early 2021, data released Wednesday showed.

Some Fed officials “noted that their contacts reported larger candidate pools for vacancies, and some participants highlighted that the ratio of vacancies to unemployed had fallen to a value only modestly above levels just before the pandemic,” the minutes said.

Fed officials also discussed their balance sheet of bond investments, which they built up during the pandemic and have shrunk by maturing securities without reinvesting them. Policymakers will have to stop downsizing their interests at some point, and several officials “suggested that it would be appropriate for the committee to begin discussing the technical factors that would guide a decision to speed up the pace of to delay redundancy long before such a decision was taken. to provide appropriate advance notice to the public.”