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Federal Reserve officials agreed at their November meeting that it would soon be appropriate to slow interest rate increases, minutes from the gathering showed, as they shifted their emphasis toward how high interest rates will eventually rise.
Central bankers lifted interest rates by three-quarters of a percentage point for a fourth straight time at their Nov. 1-2 meeting, bringing the federal funds rate to nearly 4 percent. Rates were set just above zero as recently as March.
The Fed has been carrying out the most aggressive campaign to restrain the economy in decades as it tries to wrestle the fastest inflation since the 1980s back under control. By making it more expensive to borrow money, the Fed’s rate moves can cool demand across the economy, allowing supply to come back into balance and price increases to moderate.
But officials are debating just how much additional action is needed to ensure that inflation comes to heel. They want to make certain that they do enough: Failing to curb inflation quickly could make it a more permanent feature of the American economy, which would make it even more difficult to stamp out later on. But policymakers want to avoid doing more than is necessary to restrain price increases, because doing so could cost jobs and dent wages, leaving people worse off economically.
Striking that balance will be a challenge for the Fed. The economy is behaving unusually after years of pandemic disruptions, and policymakers have few modern episodes of high inflation to use as guideposts. Many economists expect inflation to fade next year as rent increases slow and demand for goods moderates, but forecasters have been repeatedly surprised by inflation’s staying power over the past 18 months.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
That is why officials are contemplating slowing down soon. Raising rates more gradually — but to a higher ultimate level — will allow them to show they are committed to fighting inflation while giving themselves more time to observe how their moves so far are working.
“There was wide agreement that heightened uncertainty regarding the outlooks for both inflation and real activity underscored the importance of taking into account the cumulative tightening of monetary policy, the lags with which monetary policy affected economic activity and inflation, and economic and financial developments,” the minutes showed.
The minutes did not make it clear when exactly the central bank will slow its rate increases, but investors anticipate that it could step down to a half-point move next month.
Besides giving officials more time to see how policies are playing out, moving more gradually could “reduce the risk of instability in the financial system,” a “few” Fed officials said at the meeting. But a few other participants thought that it might be better to wait until rates were even higher before slowing the pace of increases.
Whatever the pace, Fed officials emphasized in November that it is the destination that is most important. Officials have suggested they are likely to raise rates higher than they had anticipated as recently as September as the economy proves fairly resilient, with several suggesting that rates could climb to 5 percent or higher.
Understand Inflation and How It Affects You
How high rates rise and how long they stay high “had become more important considerations for achieving the Committee’s goals than the pace of further increases,” the minutes showed, referring to the Federal Open Market Committee, which directs monetary policy. “Participants agreed that communicating this distinction to the public was important in order to reinforce the Committee’s strong commitment to returning inflation to the 2 percent objective.”
Since the Fed last met, fresh inflation data has suggested that price increases may finally be turning a corner. Consumer Price Index data showed that inflation faded to 7.7 percent in the year through October, down from 8.2 percent previously, as some prices of goods sank into outright decline.
Given how much the Fed has raised interest rates this year, many economists expect consumer spending and the labor market to cool down heading into 2023, which could help prices to moderate further.
But so far, the economy is proving fairly hardy. Consumer spending is slowing somewhat, but it is not falling off a cliff.
Demand for workers remains strong and wages continue to rise, factors that have prompted many Fed officials to say that they have more work to do when it comes to slowing the economy — even as the minutes showed that “some” central bankers have begun to warn that the risk of overdoing monetary policy tightening have increased.
“Many participants observed that price pressures had increased in the services sector and that, historically, price pressures in this sector had been more persistent than those in the goods sector,” the minutes noted, later adding that “risks to the inflation outlook remained tilted to the upside.”