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According to the latest meeting minutes, Fed officials agreed in September that the Fed should “proceed with caution” in interest rate decisions and acknowledged that there are “two-sided” risks in pursuing the 2% inflation target.
Federal Open Market Committee members are cautious about monetary policy while acknowledging that more needs to be done to bring inflation down to target. Officials did not raise interest rates at the meeting.
“There was broad agreement among participants that, with monetary policy in restrictive territory, risks to achieving the Committee’s objectives have become more mixed. But with inflation remaining well above the Committee’s longer-run objective and labor markets remaining tight, most participants continued to view There are upward risks to inflation,” the minutes of the meeting said.
Officials acknowledged, however, that policy “should remain restrictive for some time until the committee is confident that inflation is falling sustainably to achieve its objective.”
Two-way risks refer to the risk of too little tightening policy, which will lead to high inflation; or the risk of too much tightening policy, which may seriously inhibit economic growth.
The reference to erring on the side of caution appears twice. “All participants agreed that the committee was able to proceed with caution,” the minutes said, noting that officials would continue to make decisions based on “all” information received.
They also said that “data volatility and potential data revisions, or difficulties in estimating the neutral policy rate” supported “caution in determining the degree of additional policy tightening that may be appropriate.”
The word “careful” did not appear in the July minutes.
The minutes of the September meeting are likely to solidify expectations that the Fed is done raising interest rates this cycle. The selloff in U.S. Treasuries over the past two weeks has accelerated those expectations, as Fed officials acknowledged that rising borrowing costs may be part of the central bank’s work.
The pause in raising interest rates in September has kept the Fed’s benchmark rate in a range of 5.25-5.5%, the highest level since 2001. That’s slightly lower than where most officials predicted in their September dot-plot forecasts by the end of the year.
The initial market reaction to the release of the minutes was muted.
The Fed meeting reflected officials’ views ahead of the recent selloff in the Treasury market. The 10-year and 30-year Treasury bond yields rose to their highest levels in 16 years last week as investors believe the Federal Reserve will keep interest rates higher for longer and that U.S. economic growth in coming quarters may be better than expected.
Rising yields have hit stocks and pushed financial conditions to their tightest levels in a year. Since then, officials have come forward to say that rising yields in the U.S. Treasury market may have completed part of the Fed’s work and eliminated the need for further interest rate hikes.
Federal Reserve Vice Chairman Philip Jefferson said on Monday that he would “continue to recognize that rising bond yields will lead to tighter financial conditions” in assessing the direction of interest rates. Dallas Fed President Lorie Logan echoed those sentiments that day and Minneapolis Fed President Neel Kashkari on Tuesday.
Also on Tuesday, Atlanta Fed President Raphael Bostic said the central bank did not need to raise interest rates further and said he did not expect the U.S. to slip into a recession anytime soon.
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