Federal Reserve policymakers agreed last month that policy should remain tight for some time, while noting that the risks of too much tightening must now be balanced against keeping inflation on a downward path toward 2 percent.
“Participants generally felt that with the stance of monetary policy in restrictive territory, the risks to meeting the committee’s objectives had become more bilateral,” according to minutes of the September meeting released in Washington on Wednesday.
“All participants” agreed that the commission was able to “proceed carefully” and that policy decisions would depend on the data and take into account the “balance of risks”.
“They’re going to be parked on the side, but they’re not unpacking yet,” said Jennifer Lee, senior economist at BMO Capital Markets. “They see inflation as unacceptably high – and that there are more risks to the upside,” she added.
At the meeting, Fed officials kept their benchmark lending rate in a range of 5.25-5.5% last month and signaled rates will remain higher for longer than expected after another rate hike this year.
Since then, a rise in long-term government bond yields has led some policymakers to suggest they may delay another hike when they meet on Oct. 31-Nov. 1 as they analyze the reasons behind the promotion.
Following the release of the minutes, the Fed’s policy-sensitive two-year Treasury yield and the dollar pared gains for the day, while the S&P 500 pared losses.
Rate a debate
The minutes noted that a “majority” of Fed officials see another rate hike “would probably be appropriate” to help cool demand and bring inflation closer to their 2% inflation target over the next two years , while “some” said “no further increases would be warranted.
In forecasts released last month, 12 of 19 officials predicted another hike this year, while the median estimate showed they expected fewer rate cuts in 2024 and 2025.
“Participants generally noted that it is important to balance the risk of over-tightening against the risk of under-tightening,” the protocol said.
Omair Sharif of Inflation Insights said the future of policy remains a “tug of war” between the two risks. “The committee will proceed cautiously,” he said in a note to clients on Wednesday, adding that most were “still not confident that inflation is on a durable and sustainable path to 2%.”
An expected higher peak in interest rates, combined with a slower pace of cuts over the next two years, has sent bond markets reeling over the past three weeks. U.S. 10-year Treasury yields jumped as much as 40 basis points from the Sept. 20 meeting through Monday as corporate credit spreads widened and broader financial conditions tightened.
The rapid increase in borrowing costs appeared to have surprised some officials at the Federal Open Market Committee, who suggested they might again keep rates unchanged when officials meet in three weeks.
Political path
Fed Vice Chairman Philip Jefferson told a conference call on Monday that he would “remain mindful of tightening financial conditions through higher bond yields” as he assesses “the future path of policy.” And Dallas Federal Reserve President Laurie Logan said the same day that higher yields may reduce the need for further rate hikes.
Bond markets rallied after those comments, and futures markets were pricing in about a 10 percent chance of a quarter-point rate hike at the Fed’s next meeting.
Other Fed spokesmen on Wednesday advocated a cautious approach to future moves.
Governor Christopher Waller said the Federal Reserve could watch and see what happens before taking further action on interest rates as financial markets tighten. Atlanta Federal Reserve President Rafael Bostick said the central bank does not need to keep raising interest rates unless the decline in inflation starts to stop.
The minutes noted that the economy is growing at a solid pace, labor markets are reaching better balance, and inflation – while cooling – is still above target. The Dallas Federal Reserve, which strips out outliers from the consumer price index, estimated a six-month annualized inflation rate of 3.1 percent for August, down from 3.4 percent in July.
Fed officials estimate they need to achieve below-trend economic growth of 1.8% to slow rising prices.