Fed meeting minutes reinforce dovish policy approach as risks become more directional

WASHINGTON (Reuters) – Federal Reserve (US central bank) officials agreed in their latest policy meeting that they may take a cautious approach regarding raising US interest rates in the future, and they will not need to raise them unless the information received shows insufficient progress in reducing inflation. . .

“All participants agreed that the FOMC (which sets policy) was in a position to proceed cautiously,” according to minutes of the October 31-November session. 1 session released on Tuesday.

“Participants indicated that further monetary policy tightening would be appropriate if information received indicates that progress toward the inflation target set by the committee is insufficient,” the minutes said.

US stocks added slight losses after the meeting minutes were released, while the US dollar (.DXY) rose against a basket of currencies. US Treasury yields fell.

The minutes showed US central bank policymakers grappling with mixed economic signals at a meeting as they ended up holding the benchmark overnight interest rate steady in the current 5.25%-5.50% range.

Economic growth in the United States had just posted a whopping 4.9% annual gain in the third quarter, an apparently inflationary pace of growth. But financial markets pushed interest rates higher for households, businesses and the U.S. government, which threatened to limit economic and job growth too much to bring inflation back to the Fed’s 2% target.

“Participants commented on the significant tightening in financial conditions in recent months, driven by rising long-term yields,” the minutes said.

However, inflation remained “well above” the central bank’s target, likely requiring the Fed’s policy to “remain in a restrictive stance for some time until inflation is clearly moving sustainably.”

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“The overall tone of the FOMC minutes was cautiously hawkish — a commitment to remain in constricted territory for some time was the clearest takeaway,” said Ian Lingen, strategist at BMO Capital Markets.

There is no declaration of victory

The minutes, which set conditions around the need for further rate hikes and put greater emphasis on how long the current interest rate may need to be maintained, signal an important shift in the Fed’s policy dialogue.

Federal Reserve Chairman Jerome Powell used the concept of “caution” liberally in his recent news conference in describing the central bank’s efforts to balance still-high inflation against tightening credit conditions and a sense that the economy is about to slow.

Policymakers have generally rallied around this approach at a time when they appear unlikely to raise their target interest rate further, but they do not want to say so while inflation, at 3.4% based on the Fed’s preferred measure, remains unchanged. Much higher than the central average. Bank goal.

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There is good reason for caution, as the Fed is likely about to pull off the unexpected by emerging from the worst inflation spike in 40 years without doing much damage to the economy.

a Study of New York Federal Reserve Bank employees Data released Tuesday suggest that the U.S. central bank’s late start in raising interest rates, with the first increase coming a year after rates began rising sharply, has allowed the economy to achieve more growth with the same progress in lowering inflation than it otherwise would have. The case if price increases had started sooner.

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However, there is little appetite among policymakers to declare victory yet, or give investors much direct guidance on what will happen next.

“Inflation has given us some fudge,” Powell said at an IMF research conference earlier this month. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.” “However, we will continue to move cautiously, allowing us to address the risk of being misled by a good few months of data, and the risk of over-tightening.”

However, most investors believe that the Fed is done raising interest rates. Contracts tied to the benchmark overnight federal funds rate continued to show near-zero probability of further increases after the minutes were released. The odds of a rate cut at the Fed’s April 30-May 1, 2024 meeting rose slightly to nearly 60%, from about 57% before the minutes were released, according to CME Group’s FedWatch tool.

The minutes did not address that possibility, with officials insisting they still weren’t entirely sure the interest rate was “sufficiently restrained” to end the inflation battle.

Fed policymakers have said publicly that their decision on how long to keep the current interest rate in place will depend on how inflation behaves, with continued progress toward the 2% target a necessary condition for any change.

Howard Schneider reports. Additional reporting by Lindsay Densmuir and Michael S. Edited by Paul Simao

Our standards: Thomson Reuters Trust Principles.

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Covering the US Federal Reserve, monetary policy and economics, he is a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics correspondent and local staff for The Washington Post.

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