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Fed officials discussed slowing interest rate hikes ‘soon’

Federal Reserve officials agreed at their November meeting that it would soon be appropriate to cut interest rate hikes, minutes of the meeting showed, as they shifted their emphasis to how interest rates will eventually rise.

Central bankers raised interest rates by three-quarters of a percentage point for the fourth straight time at their meeting Nov. 1-2, raising the federal funds rate to nearly 4 percent. Rates settled just above zero in March.

The Fed has been waging the most aggressive campaign to tighten the economy in decades as it tries to tame the fastest inflation since the 1980s. By making it more expensive to borrow money, Fed rate moves may cool demand in the entire economy, allowing supply to rebalance and price increases to moderate.

But officials are debating how much further action is needed to ensure that inflation comes down. They want to make sure they do enough: if they can’t curb inflation quickly, it could become a more permanent feature of the US economy, making it even more difficult to remove later on. But policymakers want to avoid doing more than is necessary to restrain price increases, because doing so could cost jobs and lower wages, leaving people worse off economically.

Striking that balance will be a challenge for the Fed. The economy is performing unusually after years of disruptions from the pandemic, and policymakers have few modern episodes of high inflation to use as a guide. Many economists expect inflation to ease next year as rents rise slowly and demand for goods rises moderately, but forecasters have repeatedly been surprised by the staying power of inflation over the past 18 months.

That’s why officials are contemplating slowing down soon. Raising rates more gradually, but to a higher end level, will allow them to show that they are committed to fighting inflation while giving them more time to see how their moves are working out so far.

“There was broad agreement that the increased uncertainty regarding the outlook for both inflation and real activity underscored the importance of accounting for cumulative monetary policy tightening, the lags with which monetary policy affected activity economy and inflation, and economic and financial developments”. They showed the minutes.

The minutes did not make clear when exactly the central bank will slow its rate hikes, but investors anticipate that it could be cut to half a point next month.

In addition to giving officials more time to see how policy plays out, moving more gradually could “reduce the risk of instability in the financial system,” some Fed officials said at the meeting. But some other participants thought it would be better to wait until rates were even higher before slowing the pace of increases.

Whatever the pace, Fed officials stressed in November that the most important thing is fate. Officials have suggested they are likely to hike rates more than they had anticipated in September as the economy proves quite resilient, with several suggesting rates could rise to 5 percent or higher.

How rates rise and how long they stay high “have become more important considerations in achieving the Committee’s objectives than the pace of further increases,” the minutes showed, referring to the Federal Open Market Committee, which directs policy. monetary. “Participants agreed that communicating this distinction to the public was important to reinforce the Committee’s strong commitment to return inflation to the 2 percent target.”

Since the last Fed meeting, new inflation data has suggested that price increases may finally be turning around. Data from the Consumer Price Index showed inflation fading to 7.7 percent in the year to October, down from 8.2 percent previously, as some goods prices collapsed completely.

With the Fed raising interest rates this year, many economists expect consumer spending and the job market to cool towards 2023, which could help prices moderate further.

But so far, the economy is proving quite resilient. Consumer spending is slowing a bit, but it’s not falling off a cliff.

Demand for workers remains strong and wages continue to rise, factors that have led many Fed officials to say they have more work to do when it comes to slowing the economy, even as the minutes show “some” central bankers they have begun to warn that the risk of exaggerating the tightening of monetary policy has increased.

“Many participants noted that price pressures had increased in the services sector and that, historically, price pressures in this sector had been more persistent than those in the goods sector,” the minutes noted, later adding that “the risks to the inflation outlook remained tilted to the upside.”

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