Nearly all Federal Reserve policymakers agreed earlier this month to slow the pace of their rate hikes to a quarter point, with only “a few” backing a bigger hike of half a point.
The minutes of the Fed’s Jan. 31-Feb. 1 meeting say most officials backed the quarter-point hike because a slower pace “would better allow them to assess the economy’s progress.” towards reducing inflation to their 2% target. The increase took the Fed’s benchmark rate to a range of 4.5% to 4.75%, the highest in 15 years.
Central bank rate hikes typically drive up the cost of mortgages, car loans, credit card borrowing and business loans.
At the meeting, Fed officials also unanimously agreed that “continued increases” in the Fed’s key rate “would be appropriate,” indicating further hikes in the next two meetings, at least.
Overall, the minutes showed Fed policymakers underscored their determination to keep rates high to rein in high inflation, even as they welcomed a slowdown since the fall.
Since the meeting, the outlook for inflation has become more worrying. At a press conference on February 1, after the meeting, Chairman Jerome Powell stressed that inflation, although still too high, was gradually cooling. He also suggested it was still possible the Fed could stifle inflation without raising rates to such a level that it causes widespread layoffs and a deep recession.
“The disinflationary process has begun,” Powell said then, referring to the steady slowdown in year-on-year inflation from a peak of 9.1% in June to 6.5% in December. .
But since then, a succession of economic reports have highlighted a still robust economy despite the Fed’s eight rate hikes in the past year. Hiring has accelerated, retail sales have rebounded and revised numbers show inflationary pressures remain elevated and may require more Fed rate hikes than many had assumed.
Last week, a government report showed consumer price inflation rose faster than expected from December to January, and the year-on-year figure barely slowed last month, at 6.4%. Taking into account revisions to previous months, inflation increased to 4.6% over the previous three months, from 4.3% in December.
Over the past three months, so-called core prices, which exclude volatile food and energy costs, have risen at an annual rate of 4.6%. This figure is lower than the year-over-year number and suggests that further declines are to come. But that figure is up from 4.3% in December.
With the economy now looking stronger and inflation more persistent, economists expect the Fed to raise its key rate higher this year than expected. Many now expect the central rate to raise its benchmark short-term rate to a range of 5.25% to 5.5%.
That would be three-quarters of a point higher than its current level and a quarter-point higher than the Fed had forecast in December. The prospect of higher borrowing rates for businesses and individuals has rattled financial markets, with stock prices falling and bond yields rising sharply this month.
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