Federal Reserve officials welcomed a recent slowdown in inflation at their last meeting in late January but wanted to tread cautiously as they move toward rate cuts, according to minutes from that meeting released Wednesday.
Central bankers raised interest rates sharply from March 2022 to July 2023, pushing them from a base near zero to 5.3 percent. Those moves were intended to cool consumer and business demand, which officials hoped would curb rapid inflation.
Now inflation is slowing significantly. Consumer prices rose 3.1 percent in the year to January, a significant decline from their recent peak of 9.1 percent. But that’s still faster than the pace that was normal before the pandemic, and it’s above the central bank’s target: The Fed is targeting inflation of 2 percent over time, using a different but related measure, the personal consumption expenditure index.
The economy has continued to grow solidly, even if price increases have moderated. Hiring continues to be stronger than expected, wage growth is accelerating and retail sales data suggests consumers are still willing to spend.
That combination has Fed officials pondering when and how much to cut interest rates. While central bankers have made it clear that they do not see the need to further increase borrowing costs at a time when inflation is easing, they have also indicated that they are in no hurry to cut interest rates.
“There has been significant recent progress in returning inflation to the Committee’s longer-term objective,” Fed officials reiterated in their freshly released minutes. Officials expected lower rental prices, improved labor supply and productivity gains could help inflation moderate further this year. Policymakers also said that “upside risks to inflation” had “reduced” – suggesting they have become more confident that inflation will fall sustainably.
But they also identified risks that could drive up inflation. In particular, “participants noted that aggregate demand momentum could be stronger than currently estimated, particularly given surprisingly robust consumer spending last year.”
When policymakers last released economic forecasts in December, their forecasts suggested they could cut interest rates by three quarter points this year, to about 4.6 percent. Investors now expect interest rates to be around 4.4 percent at the end of 2024, but there is a feeling they could end up a little higher or lower.
As they consider the future of policy, Fed policymakers must weigh competing risks.
If interest rates stay too high for too long, there is a risk that growth will slow more than officials want – a concern that “some” officials raised at the Fed meeting in late January. Too strict policies could drive up unemployment and even trigger a recession.
On the other hand, an early rate cut could give markets and Americans the impression that the Fed is not serious about containing inflation until it returns to full normality. If price increases increase again, it could become even more difficult to contain them later.
“Most participants pointed out the danger of acting too quickly and relaxing the political stance,” the minutes said.
Policymakers are also considering when to stop shrinking their bond balance sheets so quickly.
Officials bought lots of Treasury bonds and mortgage-backed debt during the pandemic, first to calm choppy markets and later to stimulate the economy by making even longer-term loans cheaper. This increased the Fed’s balance sheet. To reduce these holdings to more normal levels, authorities have allowed the securities to mature without reinvesting the proceeds.
But central bankers want to proceed cautiously: If they adjust the balance sheet too quickly or too much, they risk upsetting the system of financial markets. In fact, this happened in 2019 after a similar process.
Policymakers decided at their meeting that “it would be appropriate” to begin in-depth discussions about the balance sheet at the Fed’s next meeting, which will be held in March – with some suggesting it could be useful to slow down the pace of the balance sheet to slow down the contraction and that this could allow the Committee to continue unwinding the balance sheet for longer.
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2024-02-21 19:56:45
www.nytimes.com
