Federal Reserve officials have been surprised on the pace of inflation and indicated at their last meeting that they expect higher rates of interest to stay in place until prices come down, in line with minutes released Wednesday from the central bank’s September meeting.
In discussions leading as much as a 0.75 percentage point rate hike, policymakers noted that inflation is particularly taking its toll on lower-income Americans.
They reiterated rate hikes are more likely to proceed and better rates will prevail until the issue is showing signs of resolving.
“Participants judged that the Committee needed to maneuver to, after which maintain, a more restrictive policy stance as a way to meet the Committee’s legislative mandate to advertise maximum employment and price stability,” the meeting summary stated.
Officials further noted that with inflation “showing little sign to this point of abating … that they had raised their assessment of the trail of the federal funds rate that might likely be needed to realize the Committee’s goals.”
The S&P 500 gained barely on Wednesday after the discharge of the minutes as some traders took one comment as a signal the Fed could back off its rapid tightening if there was more financial markets turbulence.
“Several participants noted that, particularly in the present highly uncertain global economic and financial environment, it might be essential to calibrate the pace of further policy tightening with the aim of mitigating the danger of serious hostile effects on the economic outlook,” the minutes said.
The meeting happened ahead of a recent flow of knowledge showing that inflation pressures do remain elevated, though not on the pace they were earlier this 12 months. The Fed’s preferred inflation gauge of consumer price expenditures rose 6.2% from a 12 months ago – 4.9% excluding food and energy – in August, in line with data last month that was well above the central bank’s 2% goal.
A report Wednesday showed producer prices rose 0.4% in September.
“Participants observed that inflation remained unacceptably high and well above the Committee’s longer-run goal of two percent,” the minutes said. “Participants commented that recent inflation data generally had are available above expectations and that, correspondingly, inflation was declining more slowly than that they had previously been anticipating.”
Members of the rate-setting Federal Open Market Committee noted on the meeting that the economy must slow to get inflation to chill. They lowered their projections for the economy, expecting GDP to grow at only a 0.2% annualized pace in 2022 and just 1.2% in 2023, well below trend and massive drop from 2021, which saw the strongest gains since 1984.
Long-term inflation outlook
They said inflation was being driven by supply chain problems that weren’t limited to goods but additionally to a shortage of labor.
Nevertheless, officials also expressed optimism that policy would help loosen the labor market and produce down prices. Officials have said currently they do not expect rates to remain high until inflation comes all the way in which right down to 2%.
“Participants judged that inflation pressures would progressively recede in coming years,” the summary said.
The meeting concluded with the FOMC approving its third consecutive 0.75 percentage point increase, taking benchmark rates to a spread of three%-3.25%. Markets widely expect a similar-size rise to be approved at the subsequent meeting in early November.
Officials did note that they see a degree coming when the pace of rate hikes no less than will decelerate, though they didn’t put a time-frame on when that may occur.
The minutes said FOMC members noted it “would grow to be appropriate sooner or later to slow the pace of policy rate increases while assessing the results of cumulative policy adjustments on economic activity and inflation.”
They said that point would come after the fed funds rate had “reached a sufficiently restrictive level,” after which “it likely could be appropriate to take care of that level for a while until there was compelling evidence that inflation was on track to return to the two percent objective.”
The summary of economic projections on the meeting pointed to a “terminal rate,” or end point of rate increases to be around 4.6%. Markets expect the Fed to hike into early 2023 then keep rates there through the 12 months.
Correction: Data on the Fed’s preferred inflation gauge of consumer price expenditures was released last month. An earlier version misstated the timing.