Federal Reserve officials showed little urgency to raise interest rates further

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Federal Reserve officials expressed little urgency to raise interest rates again at their most recent meeting, even as they reiterated their willingness to tighten monetary policy further if warranted by new data.

Minutes from the Federal Open Market Committee’s November meeting, released on Tuesday, confirmed that all officials are still committed to proceeding “carefully” on future rate decisions, as they debate whether they have squeezed the economy sufficiently to get inflation back down to the central bank’s 2 per cent target.

Data over the coming months would clarify the progress against inflation, the minutes emphasised, while the Fed would look for signs that demand from consumers and businesses was moderating and the labour market cooling.

According to the minutes, higher rates could be necessary “if incoming information indicated that progress towards the committee’s inflation objective was insufficient”.

All officials stressed that it would be necessary for policy to “remain at a restrictive stance for some time until inflation is clearly moving down sustainably towards the committee’s objective”.

November’s meeting marked the second-consecutive gathering at which the Fed opted against raising its benchmark interest rate and instead kept the federal funds rate steady at a 22-year high of between 5.25-5.5 per cent. The central bank has held rates steady since July.

But officials have stressed that it is still too early to call time on the rate-rising phase of the central bank’s monetary tightening campaign. Mary Daly, president of the San Francisco Fed, recently told the Financial Times that prematurely declaring victory over inflation and then having to raise rates again would hurt the central bank’s credibility. 

“People need to plan and if you’re in a ‘stop-start’ mentality, then that’s really disruptive,” she said.

So far, consumer price growth remains above target but has shown signs of moderating, while monthly jobs growth has cooled from the rapid pace registered earlier this year. US economic growth is also set to decelerate following a surprisingly strong third quarter as consumers retrench in the face of dwindling savings stockpiles and souring sentiment about the outlook. Still, staffers at the Fed do not expect the economy to tip into a recession.

The minutes also suggested that officials saw the potential for tighter financial conditions, which measure companies’ costs of borrowing money, to offset the need for further action from the Fed — but only if those tighter conditions persisted.

While a recent bond market rally has brought down yields and reduced the cost of capital — in effect loosening financial conditions — Fed policymakers have not indicated much concern, given the slowing pace of inflation.

The main debate among policymakers has since begun to shift to when and how quickly the Fed will cut its benchmark interest rate next year. Earlier this month, Powell emphasised that the FOMC was “not thinking about rate cuts right now at all”.

Traders in futures markets are wagering that the Fed will hold off on any such moves until around the middle of 2024.