MNI: FOMC Says Ongoing Rate Hikes Appropriate, Minutes Show

Federal Reserve officials agreed at their December meeting that it was appropriate to slow the pace of rate hikes to 50 basis points but offered no hints on the pace of future expected increases, according to minutes from the meeting released Wednesday. 

"Participants continued to anticipate that ongoing increases in the target range 
for the federal funds rate would be appropriate to achieve the Committee’s objectives," the FOMC said. 

"Participants agreed that inflation remained well above the Committee’s longer-run 
goal of 2%, while the labor market remained very tight, contributing to upward pressures on wages and prices," the minutes said.

Against that backdrop, no FOMC member "anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023," the report said.

Fed officials still saw inflation risks as titled to the upside.

MORE PERSISTENT

"Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated," the report said. 

The central bank raised interest rates aggressively last year, including an unprecedented string of four consecutive 75 basis point rate hikes. It then decreased the size of its increases to a still robust half percentage point last month. 

The Fed in December raised borrowing costs by another 50 basis points to a range of 4.25%-4.5%, and revised up their projected peak rate for 2023 to 5.1% on median. 

Investors are looking for signs of whether policymakers will move to more normal quarter point hikes as it reaches what many see as the likely end of rate rises in this cycle. 

U.S. inflation has been coming down gradually but remains well above the central bank's target. The CPI rose 7.1% in the year to December while the Fed's preferred PCE measure climbed 5.5% in the year to November. 

HIGHER FOR LONGER

Core inflation remains elevated and some market participants fear sticky prices in services, including ongoing wage pressures which Fed Chair Jerome Powell says are not consistent with price stability, will make it hard for the Fed to reverse course and start cutting rates later this year. 

Against that backdrop, Fed officials have emphasized a "higher for longer" mantra, citing the lessons of the 1970s when they say backing off of monetary tightening prematurely led to an unanchoring of inflation expectations that proved damaging by lengthening the inflationary period. 

Minneapolis Fed President Neel Kashkari wrote in an essay Wednesday that he thinks rates should rise all the way to 5.4%, adding that "it will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked."

FOMC members cited a strong labor market as a sign that price pressures would linger. 

"Participants generally concluded that there remained a large imbalance between labor supply and labor demand, as indicated by the still-large number of job openings
and elevated nominal wage growth," the  said.