Fed Minutes Show Unity on Cautious Approach to Future Rate Hikes

Joggers pass the Marriner S. Eccles Federal Reserve building in Washington, DC.

Federal Reserve policymakers at their most recent meeting united around a strategy to “proceed carefully” on future interest-rate moves and base any further tightening on progress toward their inflation goal.

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(Bloomberg) — Federal Reserve policymakers at their most recent meeting united around a strategy to “proceed carefully” on future interest-rate moves and base any further tightening on progress toward their inflation goal. 

“All participants agreed that the committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information,” according to minutes of the Oct. 31-Nov. 1 Federal Open Market Committee meeting released in Washington Tuesday.

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At the meeting, US central bankers held the benchmark lending rate in a range of 5.25% to 5.5% for the second straight time, despite a run of data showing strong consumption and hiring, which fueled overall economic growth.

The minutes show the committee was willing to take a patient approach toward inflation while making future policy decisions dependent on incoming statistics.

“Participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing, aggregate demand was moderating in the face of tighter financial and credit conditions, and labor markets were reaching a better balance between demand and supply,” the minutes stated.

There was limited reaction in bonds and stocks following the release of the Fed minutes. Yields on 10-year Treasuries were up 1 basis point to about 4.42%, while the S&P 500 Index was down about 0.2% on the day. The Bloomberg dollar index was little changed. 

Fed officials gathered in Washington for the meeting after a bond rout pushed yields on US government 10-year Treasuries over 5%, the highest in 16 years. The increase in longer-term borrowing costs startled some officials, who said tightening financial conditions were doing the work of additional rate hikes.

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“Participants highlighted that longer-term yields could be volatile and that the factors behind the recent increase, as well as their persistence, were uncertain,” the minutes showed. “However, they also noted that, whatever the source of the rise in longer-term yields, persistent changes in financial conditions could have implications for the path of monetary policy and that it would therefore be important to continue to monitor market developments closely.”

Trader Bets

Broader financial conditions have since eased, and government 10-year yields are back down to levels last seen in September. Traders have marked down the chance of any additional hikes to almost zero and are betting the Fed will start to cut rates as early as May.

The committee is trying to manage the tension of two-sided risks: avoiding an overshoot on hikes that could send the economy into a recession, against failing to tighten enough to cool consumption and return the inflation rate to 2% in a timely way.

“Participants noted that inflation had moderated over the past year but stressed that current inflation remained unacceptably high and well above the committee’s longer-run goal of 2%,” according to the minutes. “They also stressed that further evidence would be required for them to be confident that inflation was clearly on a path to the committee’s 2% objective.”

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In September, Fed officials forecast that the policy rate would rise another quarter point by the end of the year.

The November meeting tied Powell’s record of 11 straight meetings without a dissent. The Fed chair, who was appointed by President Donald Trump and reappointed by President Joe Biden, has a lower average of dissents per meeting than any of his four predecessors.

Read more: Fed Dissents Dwindle in Powell Era Despite Policy Differences

GDP rose at an annualized rate of 4.9% in the third quarter, the fastest pace in almost two years. Job gains remain strong, while inflation, measured by the Fed’s preferred price indicator, is cooling.

The personal consumption expenditures price index, minus food and energy, rose 3.7% for the year ending September, and at 2.4% on a three-month annual rate for the same month.

“Inflation has given us a few head fakes,” Fed Chair Jerome Powell told an IMF panel on Nov. 9. “We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening.”

—With assistance from Ye Xie.

(Adds market reaction in sixth paragraph.)

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