Federal Reserve policymakers agreed last month that policy should remain restrictive for some time, while noting that the risks of overtightening now had to be balanced against keeping inflation on a downward path toward 2%.
“Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided,” according to minutes of the September meeting, released in Washington Wednesday.
“All participants” agreed that the committee was in a position to “proceed carefully” and that policy decisions would be data-dependent and take into account “the balance of risks.”
“They’re going to be parked on the side, but they’re not unpacking their bags just yet,” said Jennifer Lee, senior economist at BMO Capital Markets. “They’re seeing inflation as unacceptably high — and that there are more upside risks,” she added.
At the meeting, Fed officials held their benchmark lending rate at a range of 5.25-5.5% last month, and signaled rates would stay higher for longer than previously expected following one more rate increase this year.
Since then, a surge in long-term Treasury yields has prompted some policymakers to suggest they may hold off on another hike when they meet on Oct. 31-Nov. 1, as they parse the reasons behind the run-up.
After the minutes were published, the Fed-policy sensitive two-year Treasury yield and the dollar pared the day’s gains, while the S&P 500 Index pared losses.
Rate Debate
The minutes noted that “a majority” of Fed officials saw one more rate increase “would likely be appropriate” to help cool off demand and get inflation closer to their 2% inflation target over the next two years, while “some” said “no further increases would be warranted.”
In forecasts issued last month, 12 of 19 officials projected one more hike this year, while the median estimate showed they expected fewer rate cuts in 2024 and 2025.
“Participants generally noted that it was important to balance the risk of overtightening against the risk of insufficient tightening,” the minutes said.
Omair Sharif of Inflation Insights said the future of policy remains in a “tug-of-war” between the two risks. “The committee will proceed carefully,” he said Wednesday in a note to clients, adding that most “aren’t yet confident that inflation is on a durable and sustainable path to 2%.”
The estimated higher rate peak, coupled with a slower pace of reductions in the next two years, sent bond markets reeling over the past three weeks. Yields on US 10-year notes jumped as much as 40 basis points from the Sept. 20 meeting through Monday, while spreads on corporate credit widened and broader financial conditions tightened.
The rapid increase in borrowing costs appears to have surprised some officials on the Federal Open Market Committee, who suggested they may again keep rates unchanged when officials meet in three weeks.
Policy Path
Fed Vice Chair Philip Jefferson on Monday told a conference that he would “remain cognizant of the tightening in financial conditions through higher bond yields” in assessing “the future path of policy.” And Dallas Fed President Lorie Logan said the same day that higher yields may lessen the need for further rate increases.
Bond markets rallied after those comments and futures markets were pricing in about a 10% chance of a quarter-point rate increase at the next Fed meeting.
Other Fed speakers on Wednesday advocated for a cautious approach on future moves.
Governor Christopher Waller said the Fed can watch and see what happens before taking further action with interest rates as financial markets tighten. Atlanta Fed President Raphael Bostic said the central bank doesn’t need to keep raising interest rates unless inflation’s descent starts to stall.
The minutes noted that the economy is expanding at a solid pace, labor markets were reaching a better balance, and inflation — while it has cooled — is still running above target. The Dallas Fed, which trims away outlier prices from the personal consumption expenditures price index, calculated the six-month annual inflation rate at 3.1% for August, down from 3.4% in July.
Fed officials estimate they need to get economic growth below the 1.8% trend rate to slow price increases.
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