Miércoles 10/12/22 Precios de los productores

[admin]

Fed Minutes Show Concerns of More Persistent High Inflation
Officials last month revised up their expectations of future interest rate increases and said labor markets would need to weaken

Nick Timiraos
Updated Oct. 12, 2022 6:07 pm ET

WASHINGTON—Federal Reserve officials expressed concern at their meeting last month over the persistence of high inflation, underscoring their intention to continue raising interest rates in large steps despite the pain that could cause.

“Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” the minutes said.

The minutes suggest the Fed is likely to raise rates by 0.75 percentage point at their meeting on Nov. 1-2, said Ellen Zentner, chief U.S. economist at Morgan Stanley, in a report Wednesday. “The minutes reaffirmed a clear commitment to remain on an aggressive path of policy tightening, and maintain that higher level for longer, even as over-tightening risks are coming into view,” she said.

The Fed has lifted its benchmark federal-funds rate five times this year to a range between 3% and 3.25% from near zero, the most rapid pace of rate increases since the early 1980s to fight inflation running near 40-year highs. Officials approved rate increases of 0.75-percentage point at each of their past three meetings.

Advertisement - Scroll to Continue

The Federal Reserve's main tool for managing the economy is to change the federal-funds rate, which can affect not only borrowing costs for consumers but also shape broader decisions by companies like how many people to hire. WSJ explains how the Fed manipulates this one rate to guide the entire economy. Illustration: Jacob Reynolds
They expect higher borrowing costs to slow economic activity by curbing spending, hiring and investment, which should weaken inflation pressures.

Nearly all the policy makers who participated in last month’s gathering penciled in large interest-rate rises at each of their coming two meetings this year. The projections also suggested they would dial down the size of their rate increases by December and potentially end them by February or March.

“For the moment, they have to be singularly focused on inflation and take a position of ‘come what may,’” said Tom Graff, head of investments at Facet Wealth, a Baltimore, Md.-based investment adviser. “But it shows the bar for slowing down hikes and maybe eventually pausing is not super high.”

Advertisement - Scroll to Continue

Fed governor Christopher Waller said last week he expected new economic data—including a widely-watched inflation report to be released Thursday—wouldn’t significantly alter his outlook or that of his colleagues ahead of their next meeting, because inflation is running so far above their 2% target.

SHARE YOUR THOUGHTS

How would you rate the Fed’s response to inflationary pressure? Join the conversation below.

But he hinted officials would debate slowing the pace of rate rises while approving their fourth consecutive 0.75-point rate increase at that meeting. “We will have a very thoughtful discussion about the pace of tightening,” he said.

In a speech Monday, Fed Vice Chairwoman Lael Brainard cautioned against raising rates too rapidly to allow officials time to study how higher borrowing costs are coursing through the economy.

While her remarks didn’t directly push back against rate increases that are already anticipated by investors, they represented the most comprehensive effort by a senior Fed official this year to build the case against an even steeper path for further rate rises.

Advertisement - Scroll to Continue

Global market turmoil accelerated in the days following last month’s Fed meeting. Sharp dislocations in U.K. government-debt markets last month prompted the Bank of England to purchase large amounts of longer-dated securities to stem broad fire sales.

A series of interest-rate rises have rippled through the U.S. economy, and more are projected to be on the way. WSJ breaks down the numbers hitting Americans’ wallets this year and beyond. Photo: Elise Amendola/Associated Press
The market strains have highlighted the potential for unexpectedly rapid increases in global interest rates this year to upend investment strategies and amplify strains as bond and other asset prices fall.

Most Fed officials have said they are monitoring market volatility, but haven’t suggested the strains have materially changed their economic outlook.

Until recently, officials had hoped that they might be able to raise interest rates less aggressively and cool the labor market without triggering a big increase in unemployment. In May, Mr. Waller argued the Fed could achieve this so-called soft landing by reducing the demand for workers—causing a decline in job vacancies, which are historically elevated—without fueling significant layoffs.

Advertisement - Scroll to Continue

The persistence of inflation in recent months, however, has left officials less optimistic. “The longer inflation has stayed up, and the more aggressive we had to be” and the narrower the landing strip has grown for a soft landing, said Mr. Waller last week.

Newsletter Sign-up

Real Time Economics

The latest economic news, analysis and data curated weekdays by WSJ's Jeffrey Sparshott.

Fed officials have said they wanted to see more evidence that the labor market was cooling off, which should help ease wage pressures. But the economy has steadily added jobs this summer and unemployment remains low, while job vacancies have declined somewhat.

Meantime, inflation readings haven’t shown the kind of improvement that the Fed and many economists have wanted. The minutes showed officials’ growing concern about how long it has taken for supply-chain constraints to reduce prices for goods at the same time that tight labor markets could keep wages and prices elevated.

While Fed officials have “stopped short of saying there absolutely will be a recession, they’re definitely telling us there’s going to be a slowdown and there has to be a slowdown, which is an extraordinary admission from a central bank,” said Mr. Graff.