Fed Officials Are Worried About the Risks of Doing Too Little on Inflation
Federal Reserve officials committed to raising interest rates to a restrictive level in the near term and holding them there to curb inflation, though several said it would be important to calibrate hikes to mitigate risks.
“Several 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 with the aim of mitigating the risk of significant adverse effects on the economic outlook,” according to minutes from their Sept. 20-21 gathering released Wednesday in Washington.
During the meeting, US central bankers agreed to boost the benchmark lending rate 75 basis points for the third straight time, lifting it to a target range of 3% to 3.25% as they combat stubborn inflation pressures.
“Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” the minutes showed.
US stocks fluctuated following the release, while Treasury yields remained lower and the dollar was little changed. Traders maintained bets that the Fed will raise rates again next month by 75 basis points.
The minutes show a committee united on returning inflation back to the Fed’s 2% target, while several policymakers urged caution as interest rates reached into restrictive territory.
“They set the bar pretty high for downshifting in November” to something less than 75 basis points, said Julia Coronado, the founder of MacroPolicy Perspectives LLC. “They haven’t seen enough in the data to make that call.”
But starting with the December meeting and beyond, she said, policy is likely to give more weight to signs of market stress or signs of deterioration in the domestic economy.
The minutes suggested that Vice Chair Lael Brainard, who called for “moving forward deliberately and in a data-dependent manner” has other allies among Fed officials who still want to account for lags in policy and see if inflation can be lowered without inflicting a recession or additional market stress.
“She is not alone,” Coronado said.
Slammed by critics for being slow to respond to mounting price pressures, the Fed has unleashed the most aggressive tightening campaign since the 1980s. Starting with rates nearly zero in March, it’s hiked by 300 basis points and signaled more to come.
“The Fed remains purposefully driven to tighten monetary policy further into restrictive territory given the rather gradual cooling of economic activity and slow inflation response,” said Gregory Daco, chief economist at Ernst & Young LLP.
But “the balance of risks is rapidly shifting,” he said. “Elevated global economic and financial market uncertainty will make it essential for the Fed to calibrate its policy response, especially in the context of a globally synchronized, but uncoordinated, monetary policy tightening cycle.”
Fed officials expect to raise rates to 4.4% by the end of the year, according to their median estimate released last month, and 4.6% in 2023.
That comes at an economic cost: Higher borrowing costs are forecast to slow growth to 1.2% next year and raise the unemployment rate to 4.4%. It was 3.5% in September.
What Bloomberg Economics Says
“The minutes show policy makers are worried about downside risks to growth, but are even more worried about upside risks to inflation. Still-optimistic projections for the labor market suggest the committee may be underestimating the blow to employment from tighter monetary policy.”
-- Anna Wong (chief US economist)
“Several participants observed that as policy moved into restrictive territory, risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative restraint in aggregate demand would exceed what was required to bring inflation back to 2%,” the minutes showed.
Inflation, as measured by the Fed’s preferred gauge, has been running above the central bank’s 2% target for more than a year, testing public faith that officials can bring it back down.
“They agreed that, by moving its policy purposefully toward an appropriately restrictive stance, the committee would help ensure that elevated inflation did not become entrenched and that inflation expectations did not become unanchored,” the minutes said.
Rapidly rising borrowing costs have slowed housing activity, but other parts of the economy show resilient demand.
Employers added 263,000 jobs in September, and a consumer inflation report showed prices rose by 8.3% in the 12 months through August. September’s consumer price index, due Thursday, is expected to show a still-rapid 8.1% advance, with the core inflation rate set to return to a four-decade high.
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