Fed Minutes Showed Policymakers Were Still Intent on Easing Inflation

Federal Reserve officials believed that they needed to do more to slow the economy and wrestle painfully rapid inflation back under control as of their meeting early this month, minutes from the gathering showed.

The notes, released on Wednesday, showed that “all participants” continued to believe that rates needed to rise by more, and that “a number” of them thought that monetary policy might need to be even more restrictive in light of easing conditions in financial markets in the months prior.

“Participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook,” the minutes said. “A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures.”

The takeaway is that policymakers were still intently focused on wrestling inflation back under control even before a spate of recent data releases showed that the economy has maintained a surprising amount of momentum at the start of 2023. In the weeks since the Fed last met, inflation data have exhibited unexpected staying power, and a range of data points have suggested that both the job market and consumer spending remain robust. A release on Friday is expected to show that the Fed’s preferred inflation indicator climbed rapidly on a monthly basis in January, and that consumption grew at a solid pace.

That creates a challenge for Fed officials, who had been hoping that their policy changes last year would slowly but steadily weigh on the economy, cooling demand and forcing companies to stop raising prices so quickly. If demand holds up, businesses are more likely to find that they can continue to charge more without driving away their customers.

Central bankers have raised interest rates at the fastest pace since the 1980s over the past year, pushing them from near zero at this time in 2022 to more than 4.5 percent this month. Officials signaled in December that they might need to raise rates above 5 percent this year, but those estimates have been creeping higher, to perhaps above 5.25 percent. And key policymakers have been clear that if the economy fails to slow as expected, they will do more to make sure momentum cools.

Higher interest rates weigh on the economy by making it expensive for households to borrow to buy a new car or purchase a house, and by making it pricier for businesses to expand on credit. As those transactions stall, the aftershocks trickle through the economy, slowing not just the housing and automobile markets but also the labor market and retail and services spending as a whole.

But the full effect of policy takes time to play out, which makes it difficult for central bankers to assess in real time how much policy tightening is exactly the right amount to slow the economy and bring inflation to heel. Overdoing it could come at a cost: leaving more people out of work, with lower incomes and more limited prospects, than is necessary.

Yet the 1970s taught central bankers that allowing inflation to remain high for a long time without decisively acting to bring it under control is also a painful error. Back then, the Fed allowed inflation to run higher for years, and it eventually jumped so out of control that central bankers had to institute draconian rate increases to wrangle prices. Unemployment jumped to double digits.

Officials slowed their rate increases in February, and have signaled that they will continue to raise rates by a modest quarter point per meeting pace in coming meetings. Some policymakers — including Loretta Mester at the Federal Reserve Bank of Cleveland — have been clear in public that they would have preferred a bigger move at the latest meeting.

While the minutes acknowledged that “a few participants” would have supported or even preferred a half-point move, they said smaller adjustments were seen as a way to balance risks.

Almost all observed that slowing “would allow for appropriate risk management as the committee assessed the extent of further tightening needed to meet the committee’s goals,” the minutes said.

Now the question is just how high rates must rise, and how long they will stay there.

The challenge for central bankers is that several factors playing out in early 2023 suggest that the economy retains substantial strength. Americans are getting jobs and winning raises, shoring up household incomes. They are still sitting on savings piles amassed during the pandemic, though those are shrinking. Many older households have just received a cost-of-living increase of 8.7 percent in their first Social Security check of the year.

Even as of the Jan. 31-to-Feb. 1 meeting, officials saw several reasons that inflation might remain too high: China’s reopening from coronavirus lockdowns could add to demand, Russia’s war in Ukraine could cause supply disruptions, and the labor market might stay strong for longer than expected, according to the minutes.

Yet policymakers also saw reasons inflation might fade quickly. Among them, many global central banks have raised interest rates, and the United States could be vulnerable to tipping into an outright recession after a period of more subdued growth. Plus, the country could face financial or economic problems if Congress’s debate over raising the debt limit drags out.

“A number of participants stressed that a drawn-out period of negotiations to raise the federal debt limit could pose significant risks to the financial system and the broader economy,” the minutes said.