MNI: Tighter Fin. Conditions Could Affect Policy Path -Minutes

Federal Reserve officials believed tighter financial conditions could lessen the need for additional monetary tightening as they decided to hold interest rates steady for the second straight meeting earlier this month, according to minutes of the central bank's November meeting.

“Financial conditions had tightened significantly in recent months,” the minutes said. “Persistent changes in financial conditions could have implications for the path of monetary policy and it would therefore be important to continue to monitor market developments closely.”

A spike in ten-year Treasury note yields to around 5% in recent months has been a major focus of policymakers, many of whom have said tighter financial conditions could reduce the need for additional Fed tightening. Still, long-term rates have retraced a substantial part of that rise, and ten-year note is currently yielding around 4.4%.

Top policymakers have not closed the door to additional hikes in recent public remarks, but many have indicated the bar is high for further tightening. That's because recent inflation readings have been benign, labor market activity is moderating, and many officials are convinced policy lags have yet to fully kick in.

“Participants judged that aggregate demand and aggregate supply continued to come into better balance, as a result of the current restrictive stance of monetary policy and the continued normalization of aggregate supply condition,” the minutes said.

Officials said the banking system is sound but they remain worried about the kinds of issues that led to the regional banking turmoil of March.

“Many participants commented that unrealized losses on assets resulting from the rise in longer-term interest rates, significant reliance by some banks on uninsured deposits, and increased funding costs at banks warranted monitoring,” the Fed said.

FURTHER EVIDENCE

The Fed raised rates aggressively starting from March 2022 to July of this year, bringing the federal funds rate to a 22-year high range of 5.25-5.5%.

The Consumer Price Index has come down sharply from an annualized peak of 9.1% last summer to 3.2% in October, though Fed officials remain cautious about prematurely claiming victory in the fight to bring inflation sustainably back to 2%.

“Further evidence would be required for them to be confident that inflation was clearly on a path to the committee’s 2% objective,” the report said. “All participants judged that it would be appropriate for policy to remain at a restrictive stance for some time until inflation is clearly moving down sustainably toward the Committee’s objective.”

The staff expects fourth-quarter GDP to slow markedly from its third quarter rate near 5%, the report said.