“All participants agreed that the (Federal Open Market) Committee was in a position to proceed carefully,” according to minutes of the Oct. 31-Nov. 1 session that were released on Tuesday.
“Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee’s inflation objective was insufficient,” the minutes said.
The minutes showed U.S. central bank policymakers wrestling with conflicting economic signals at a meeting where they ended up holding the benchmark overnight interest rate steady in the current 5.25%-5.50% range.
U.S. economic growth had just registered an outsized 4.9% annualized gain in the third quarter, a seemingly inflationary pace of growth. But financial markets had driven interest rates higher for households, businesses and the U.S. government, threatening to curb economic and job growth more than might be necessary to return inflation to the Fed’s 2% target.
“Participants commented on the significant tightening in financial conditions in recent months, driven by higher longer-term yields,” the minutes said.
Still, inflation “remained well above” the central bank’s target, likely requiring Fed policy “to remain at a restrictive stance for some time until inflation is clearly moving down sustainably.”The minutes, putting conditions around the need for further rate hikes and focusing more on how long the current policy rate may need to be maintained, signal an important shift in the Fed’s policy dialogue.
Fed Chair Jerome Powell made liberal use of the “careful” concept at his last press conference in describing the Fed’s efforts to balance still-elevated inflation against tightening credit conditions and a sense the economy was about to slow.
Policymakers in general have rallied around that approach at a time when they seem unlikely to raise the target interest rate any further, yet don’t want to say so while inflation, at 3.4% based on the Fed’s preferred measure, remains well above the central bank’s target.
NO VICTORY DECLARATION
There’s good reason to be cautious, with the Fed possibly on the verge of pulling off the unexpected by navigating out of the worst inflationary surge in 40 years without doing major damage to the economy.
A New York Fed staff study released on Tuesday suggested in fact that the U.S. central bank’s late start in raising interest rates, with the first hike coming a year after prices began a sharp rise, allowed the economy to bank more growth with the same progress on lowering inflation than would have been the case if rate increases had started sooner.
There’s little appetite among policymakers, however, to declare victory yet, or to give investors much direct guidance about what will happen next.
“Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Powell said at an International Monetary Fund research conference earlier this month. “We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of over-tightening.”
Most investors, however, think the Fed is done raising rates. Contracts tied to the benchmark overnight federal funds rate show a near zero probability of further increases. Ahead of the release of the minutes, the CME Group’s FedWatch Tool put the odds of a rate cut at about 57% for the Fed’s April 30-May 1, 2024 policy meeting.
The minutes didn’t address that possibility, with officials insisting they still aren’t completely certain the policy rate is “sufficiently restrictive” to finish the inflation fight.
Fed policymakers publicly have said their decision about how long to keep the current rate intact will depend on how inflation behaves, with continued progress to the 2% target the necessary condition for any change.