Federal Reserve officials welcomed the recent slowdown in inflation at their last meeting in late January, but were determined to proceed cautiously as they tiptoe toward rate cuts, according to minutes of this gatheringwhich were published on Wednesday.
Central banks sharply raised interest rates from March 2022 to July 2023, pushing them to 5.3% from a starting point near zero. The measures were aimed at curbing consumer and business demand, which officials hoped would curb rapid inflation.
Today, inflation is slowing significantly. Consumer prices rose 3.1 percent in the year through January, down sharply from their recent peak of 9.1 percent. But that’s still faster than the normal pace before the pandemic, and above the central bank’s target: The Fed targets 2% inflation over time using a different but related measure, the Consumer Spending Index. personal consumption.
The economy continued to grow at a solid pace, although price growth moderated. Hiring remained stronger than expected, wage growth continues and retail sales data suggests consumers are still willing to spend.
That combination leaves Fed officials wondering when — and by how much — to cut interest rates. While central bankers have made it clear they don’t think they need to raise borrowing costs further at a time when inflation is moderating, they have also suggested they are in no rush to cut rates.
“Significant progress has been made recently in returning inflation to the committee’s long-term objective,” Fed officials reiterated in their freshly released minutes. Officials believed that lower rent prices, improved labor supply and productivity gains could help further moderate inflation this year. Policymakers also suggested that “upside risks to inflation” had “reduced”, suggesting they are increasingly confident that inflation will fall sustainably.
But they also identified risks that could push up inflation. In particular, “participants noted that aggregate demand dynamics may be stronger than currently estimated, particularly in light of surprisingly resilient consumer spending last year.”
When policymakers last released their economic projections in December, their forecasts suggested they could cut rates by three-quarters of a point this year, to around 4.6 percent. Investors are I bet now that rates will end 2024 at around 4.4 percent, although some feel they could end up being slightly higher or lower.
When considering the future of their policy, Fed policymakers must balance competing risks.
Leaving interest rates too high for too long would risk slowing growth more than officials would like – a concern that “a few” officials raised at the Fed’s meeting in late January. Policies that are too strict could increase unemployment and even trigger a recession.
On the other hand, a premature rate cut could suggest to markets and ordinary Americans that the Fed is not serious about crushing inflation until it is completely back to normal. If price increases were to increase again, they could be even more difficult to suppress in the long term.
“Most participants highlighted the risks of moving too quickly to relax the policy,” the minutes said.
Policymakers are also wondering when to stop shrinking their bond balance sheets so quickly.
Officials have bought a lot of Treasury securities and mortgage-backed debt during the pandemic, first to soothe ailing markets and then to stimulate the economy by making long-term borrowing even cheaper. This inflated the size of the Fed’s balance sheet. To return these holdings to a more normal level, the authorities allowed the securities to mature without reinvesting the proceeds.
But central bankers want to act cautiously: if they adjust the balance sheet too quickly or too sharply, they risk disrupting the plumbing of financial markets. In fact, this happened in 2019 after a similar process.
Policymakers decided at their meeting that “it would be appropriate” to begin in-depth discussions on the balance sheet at the Fed’s next meeting, which takes place in March – with some suggesting it might be helpful to slow down the rhythm of the contraction. and that it “could allow the committee to continue the balance sheet runoff for longer.”
