Federal Reserve officials were surprised at the pace of inflation and said at their last meeting that they expected higher interest rates to remain in place until prices eased, according to minutes released Wednesday from the central bank’s September meeting.
In discussions leading up to a 0.75 percentage point rate hike, policymakers noted that inflation is hitting lower-income Americans particularly hard.
They reiterated that rate hikes are likely to continue and higher rates will prevail until the problem shows signs of resolution.
“Participants judged that the Commission should move forward and then maintain a more restrictive policy stance in order to fulfill the Commission’s statutory mandate to promote maximum employment and price stability,” the meeting summary said.
The officials further noted that with inflation “showing little sign of abating so far … they had raised their estimate of the path in the federal funds rate that would likely be needed to meet the Commission’s objectives.”
The S&P 500 gained slightly on Wednesday after the minutes were released, as some traders took the comment as a sign that the Fed could pull back its rapid tightening if there was more turmoil in financial markets.
“Many participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening to mitigate the risk of material adverse effects on the economic outlook,” the minutes said. .
The meeting came in the face of a recent flow of data showing that inflationary pressures remain high, although not at the pace they were earlier this year. The Fed’s preferred inflation measure of consumer price expenditures rose 6.2% from a year ago – 4.9% excluding food and energy – in August, according to data from last month that were well above central bank target of 2%.
A report on Wednesday showed producer prices rose 0.4% in September.
“Participants noted that inflation remained unacceptably high and well above the Commission’s long-term target of 2%,” the minutes said. “Participants commented that recent inflation data were generally above expectations and that, correspondingly, inflation was coming down more slowly than previously expected.”
Members of the Federal Open Market Committee’s rate-setting committee noted at the meeting that the economy needs to slow to reduce inflation. They cut their forecasts for the economy, expecting GDP to grow at an annual rate of just 0.2% in 2022 and just 1.2% in 2023, well below trend and the big decline since 2021, which marked the strongest profits since 1984.
Long-term inflation outlook
They said the inflation was due to supply chain problems not limited to goods but also highlighted by labor shortages.
But officials also expressed optimism that the policy would help ease the labor market and lower prices. Officials recently said they don’t expect interest rates to stay high until inflation hits 2 percent.
“Participants judged that inflationary pressures will gradually ease over the coming years,” the summary said.
The session ended with the FOMC approving its third straight hike of 0.75 percentage points, lifting benchmark interest rates to a range of 3%-3.25%. Markets widely expect an increase of a similar size to be approved at the next meeting in early November.
Officials noted that they see a point coming where the pace of rate hikes will at least slow, though they did not put a time frame on when that would happen.
The minutes state that FOMC members noted that “it would be appropriate at some point to slow the pace of policy rate increases while the effects of cumulative policy adjustments on economic activity and inflation are assessed.”
They said there would be a time after the Fed Funds rate had “reached a fairly restrictive level,” after which it would “probably be appropriate to maintain that level for some time until there were convincing signs that inflation was going to return to the 2 percent target.”
The summary of economic forecasts at the meeting indicated that a “tail rate,” or end point of rate hikes, will be around 4.6%. Markets expect the Fed to raise rates in early 2023 and then keep rates there throughout the year.