The Fed’s headquarters in Washington, D.C.
Dreamstime
Text size
Federal Reserve officials saw that slowing inflation could support a peak in the federal-funds rate this year and emphasized their dependence on the incoming economic data, minutes from their last policy meeting show.
The Federal Open Market Committee, or FOMC, opted to raise its benchmark interest rate by 0.25 percentage point, to a target range of 4.50% to 4.75%, at its most recent Jan. 31-Feb. 1 meeting. The move followed six consecutive larger increases of 0.50 or 0.75 percentage point. Markets rallied after the meeting, as traders predicted a coming end to the Fed’s tightening campaign.
The gathering, however, ended before January jobs and retail sales data came in hotter than expected. Following those data points, futures markets had moved to price in a higher peak in the fed-funds rate this year.
The minutes from the FOMC meeting, released Wednesday afternoon, showed that most Fed officials supported slowing the pace of interest rate increases as they assessed the incoming economic and inflation data.
Stocks wavered, then fell, following the publication of the meeting minutes on Wednesday. The
S&P 500
slipped 0.4%, while the
Dow Jones Industrial Average
edged down 0.5% in recent trading.
“Almost all participants agreed that it was appropriate to raise the target range for the federal-funds rate 25 basis points at this meeting,” the minutes read. “Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability.”
“A few” participants favored a 0.50 percentage point increase on Feb. 1, according to the minutes.
FOMC officials, however, remained sensitive to the risk of not doing enough to get inflation under control. They also emphasized that inflationary pressures won’t be diminished overnight, and in turn the central bank might need to hold interest rates higher for longer to get back toward its 2% annual target.
“Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time,” the minutes read.
Some officials also pointed to easing financial conditions in recent months, which could necessitate tighter monetary policy in response. Those include a sharp rise in stock prices and a decline in bond yields since the start of the year, and a fall in mortgage rates. Those moves have reversed partially since the stronger-than-expected data in early February.
Tighter financial conditions, in a bid to rein in decades-high inflation, helped 2022 turn out to be the worst year for stocks since 2008. The market rallied to start 2023 on hopes that the worst was over, but mixed messages in economic data point to the persistence of rising prices.
Most notably, a strong jobs report, accelerating retail sales, and a new inflation number have come out since the FOMC meeting. The January jobs report showed a 517,000 increase in nonfarm payrolls, up from 223,000 jobs in December. The consumer price index rose 0.5% in January, compared with 0.1% the previous month.
Since then, Fed officials have taken an incrementally more hawkish tone in public remarks. Fed Chair Jerome Powell has reiterated that it would take a long time for monetary policy to have its intended effect on inflation. Both Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard—neither is a voting member of the FOMC—have suggested a half-point increase could be in play next month.
Markets won’t have long to wait for the next data point. On Friday, comes the release of the personal-consumption expenditures (PCE) index, the Fed’s preferred measure of inflation. The next FOMC meeting will be on March 21-22.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
American Dollar Exchange Rate
