Fed officials commit to restrictive rates but calibration needed: Minutes- QHN

Federal Reserve officials committed to raising interest rates to a restrictive level in the near term and holding them there to get inflation back to their target, though several said it would be important to calibrate the pace of rate hikes to mitigate adverse risks to the economy.

“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.

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.

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.

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.

“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.