Federal Reserve officials wanted to use their final 2023 policy statement to signal that interest rates could 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, explain why officials changed a key sentence in that statement: They added “any” to the phrase promising that officials would work to evaluate “the scope of any additional policy reaffirmations that may be appropriate.” The point was to convey the judgment 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 interest rates unchanged in their Dec. 13 policy decision and forecast they would cut borrowing costs three times in 2024. Both the meeting itself (and recent minutes outlining the Fed’s thinking) Federal Reserve) have suggested that the central bank is shifting to the next phase in its fight against rapid inflation.
“Several participants commented that the Committee’s past policy actions were having the desired effect of helping to slow aggregate demand growth and cool labor market conditions,” the minutes said at another point. With this in mind, they “expected that the Committee’s restrictive policy stance would continue to soften household and business spending, helping to promote further reductions in inflation in the coming years.”
The Federal Reserve rapidly raised interest rates starting in March 2022, hoping to slow economic growth by making borrowing more expensive for households and businesses. The economy has remained surprisingly resilient in the face of those measures, which drove interest rates to their highest level in 22 years.
But inflation has cooled sharply since mid-2023, and the Federal Reserve’s preferred measure of price increases rose 2.6 percent in the year through November. While that figure is still faster than the central bank’s 2 percent inflation target, it is much more moderate than the 2022 peak, which was above 7 percent. That has allowed the Federal Reserve to back away from rate increases.
Previously, officials hoped to make one last quarter-point move in 2023, which they ultimately skipped. Now, Wall Street is focused on when they will start cutting interest rates and how quickly they will lower them. While rates are currently set in a range of 5.25 to 5.5 percent, investors are betting they could fall to between 3.75 and 4 percent by the end of 2024, depending on market prices before The minutes will be published. Many expect rate cuts to begin in March.
But Fed officials have suggested they may need to keep interest rates at least high enough to weigh on growth for some time. Much of the recent progress has come as supply chain issues have become clearer, but a further slowdown may require a pronounced economic cooling.
“Several participants assessed that the recovery of supply chains and labor supply was largely complete and therefore continued progress in reducing inflation may need to come primarily from further weakening demand for products and labor, and that 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 strong, hiring has retreated. Job postings fell in November to the lowest level since early 2021, data released Wednesday showed.
Some Fed officials “noted that their contacts were reporting larger pools of applicants for vacancies, and some participants highlighted that the share of vacancies and unemployed workers had fallen to a value only modestly above its level just before the pandemic.” ”, the minutes state.
Fed officials also discussed their balance of bond holdings, which they built up during the pandemic and have been reduced by allowing the securities to expire without reinvesting them. Authorities will have to stop reducing their stakes 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 slow the pace of the second round well before such a decision was reached.” ”. in order to notify the public with adequate advance notice.”
