The Fed minutes could signal the end game of rate hikes, a new round of negotiations

WASHINGTON, Jan 4 (Reuters) – The Federal Reserve ended 2022 with a firm promise at its December policy meeting that interest rates would continue to rise this year, but at a slower pace and perhaps only by three-quarters of a percent.

The reading of this session, which will be broadcast at 14:00 EST (1900 GMT) on Wednesday, may provide additional information on how the endgame of the current tightening cycle will play out and how deeply US central bank officials are beginning to weigh the risks. economic growth against their highest concerns about inflation.

New data released Wednesday gave little indication that the U.S. labor market is beginning to slow in the way Fed officials had hoped. The number of jobs was little changed in November and the number of job seekers remained high – a data point that Fed Chairman Jerome Powell highlighted as a signal of continued wage growth that could boost inflation going forward.

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The Labor Department’s December employment report will be released on Friday, with the latest consumer inflation data set to be key indicators next week as the Fed plans its next policy move.

The overall tone of the upcoming minutes will likely see inflation top the agenda among policymakers at the Dec. 13-14 meeting. The pace of price increases has been slowing for several months, but as of November the Fed’s preferred inflation gauge, the consumer price index, was still rising at an annual rate of 5.5%, more than twice the Fed’s 2% target.

In an essay published Wednesday, Minneapolis Fed President Neel Kashkari said he felt interest rates would have to rise a bit higher than his peers expected, and even higher, unless inflation slowed as expected.

“Until we are confident that inflation has peaked, it would be appropriate to continue to raise rates at least for the next few meetings,” Kashkari said, adding that he sees a potential stopping point for the federal funds rate at 5.4% this year. 5.1% median forecast for 2023 by 19 Fed officials. “Any sign of slow progress that keeps inflation higher for longer would, in my view, keep the policy rate potentially higher.”

At its December meeting, the Fed raised the target federal funds rate by half a percentage point to a range of 4.25% to 4.50%.


While there was a rough consensus about next year, forecasts for 2024 differ sharply, with one Fed official seeing the policy rate held at 5.625%, another seeing it cut to 3.125%, and no more than seven officials agreeing on any particular issue. A ratio in an economy that may still be flirting with or mired in recession.

By describing the different viewpoints and the approximate size of the groups of policymakers who offered them, the minutes may indicate that the Fed’s internal deliberations are entering a new phase in which the risks to economic growth and employment are more nuanced and broader opinions are given. about the trade-offs needed to keep inflation down.

LH Meyer economist Derek Tang wrote on Tuesday that the Fed “seems united on taking policy above 5%, but fairly divided on exit strategy; how much to hold the other side and how deep and fast to ease.”

The minutes could also help gauge how much sentiment there is to cut the pace of upcoming interest rate hikes by a quarter of a percentage point between Jan. 31 and Feb. 31. 1 meeting, a way to balance the competing risks the Fed may face this year if inflation continues to fall and the economy continues to slow.

The Fed has used a three-quarter rate hike for most of 2022, but cut that to a half-percent hike in December and signaled it would slow the pace further.

In December, Fed Chairman Jerome Powell insisted that the central bank would do its best to control inflation, but he said officials recognized the risks of overdoing it — something Fed staff have also begun to emphasize.

In the minutes of the Nov. 1-2 meeting, Fed staff put roughly equal odds on a recession in 2023, and new research late last month warned that the combined effect of simultaneous rate hikes by the world’s major central banks could be greater than expected. policies in one country affect bond yields, currency values, and trading patterns in another.

Fed economists Dario Caldara said, “Spreads in particular are difficult to estimate and there are concerns that policymakers are underestimating them. In such a situation, there is a risk of excessive tightening, which central banks should be, and we believe we know that.” , wrote Francesco Ferrante and Albert Queralto.

Reporting by Howard Schneider; Edited by Dan Burns and Paul Simao

Our standards: Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

He covers the US Federal Reserve, monetary policy and economics, and is a graduate of the University of Maryland and Johns Hopkins University, with experience as a foreign correspondent, economics correspondent and on the domestic staff of the Washington Post.

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