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Federal Reserve policymakers think unemployment will likely need to rise before inflation falls, notes from last month’s two-day meeting turned out to be Wednesday.
The minutes of the September 20-21 meeting found that many Fed officials stressed “the costs of taking too little action to curb inflation probably outweighed the costs of taking too much action.”
Fed officials believe that a “softening in the labor market would be needed to ease inflationary pressures” and that the shift would be “accompanied by a rise in the unemployment rate,” the meeting minutes said.
The minutes showed that Fed officials remain committed to further tightening policies if necessary to curb rampant inflation, which stood at 8.3 percent in August.
The Fed is trying to control rising consumer prices by cooling the economy with higher interest rates, raising the cost of loans for households and businesses.
But on the other hand, raising interest rates risks fueling layoffs and raising the unemployment rate, which currently remains near historic lows of 3.5 percent, amid a roaring job market.
Fed Chair Jerome Powell was seen last week. New meeting minutes show Federal Reserve policymakers believe unemployment will likely have to rise before inflation falls
The Fed’s rate hikes since the start of the year can be seen above
The new minutes indicate that many Fed policymakers now see the risk of uncontrolled inflation as greater than the risk of a weaker labor market.
The next consumer price index report with data for September is expected to be released on Thursday and is expected to show another decline in headline inflation, but core inflation, excluding volatile food and energy prices, is reaching a new high in 40 years.
At the September meeting, many officials said they had increased their assessment of the path of rate hikes likely to be needed to meet the committee’s goals.
That said, several participants in the discussion said it would be important to “calibrate” the pace of further policy tightening with the aim of reducing the risk of significant adverse effects on the economic outlook.
The minutes show that at their meeting, policymakers expressed concern that the US economy could be vulnerable to damage from a sputtering Chinese economy and a slowdown in Europe as a result of Russia’s war on Ukraine.
At last month’s meeting, Fed officials raised interest rates for the third time in a row by three-quarters of a percentage point, to 3.25 percent, in a bid to push inflation back from a 40-year high.
Fed Chair Jerome Powell swore afterwards that they would “hold it on until we are sure the job is done.”
Federal Reserve policymakers have been united in their comments as they see an urgent need to tackle inflation, which they fear may become embedded, even if their aggressive policy tightening comes at the cost of higher unemployment.
By raising its key short-term interest rate, the Fed is trying to cool the economy to contain rampant inflation, which remains stubbornly high at 8.3% in August
Fed policymakers have released this projection, showing their beliefs about the future unemployment rate in the US, which has been low at 3.5% for nearly five decades.
The past few weeks have marked a turning point for financial markets, which for much of the year clung to the belief that the Fed would quickly change course next year and cut interest rates in the face of slowing growth and higher unemployment.
Fed officials have openly reversed that expectation, saying they expect interest rates to remain high for some time after they finish lifting them.
As markets completely consumed the Fed’s hawkishness, the result was crushing losses for US equity markets, rapidly rising sovereign debt yields and a surging dollar that has exacerbated weak conditions in overseas markets.
As of March this year, the Fed has hiked rates five times at an aggressive pace that has raised its key short-term interest rate to a range of 3 percent to 3.25 percent, the highest level since 2008.
The central bank will raise interest rates again at its meetings in November and December, starting with another big three-quarter point hike early next month.
Powell has warned that wringing high inflation out of the economy will “cause pain,” with higher unemployment and, many fear, a sharp economic downturn next year.
Recent inflation data has shown little to no improvement despite the aggressive tightening by the Fed, and the labor market remains robust and wages are also rising robustly.