Federal Reserve officials worried that inflation could remain uncomfortably high, minutes Their December meeting revealed, and some policymakers worry, that financial markets may misinterpret their decision to raise interest rates as a sign that they are too tired to respond to America’s rapid price gains. giving up the fight against

Inflation has begun to slow down but remains abnormally high: Personal Consumption Expenditure Price Index climbed 5.5 percent In the year through November, that has nearly tripled the Fed’s 2 percent inflation target but still below the peak of 7 percent in June 2022. Fed officials still see inflation as unacceptably high, as at their meeting last month — and are concerned that the rapid price gains may have staying power.

“Risks to the inflation outlook are tilted to the upside,” Fed officials warned during their December policy meeting, minutes released Wednesday showed. “Participants cited the possibility that price pressures could prove more persistent than anticipated, for example, with the labor market remaining tighter than anticipated.”

Such risks set up a challenging year for Fed policymakers, who will need to decide how high they need to raise interest rates – and how long they need to keep them high – to contain inflation. To bring firmly under control. The Fed wants to avoid retreating too quickly, which could trap inflation in the economy. But officials are also aware that higher rates come at a cost: As they slow growth and weaken the labor market, workers are more likely to lose their earnings and even lose their jobs. Job can also go.

So the Fed wants to tread carefully, getting price increases under control without causing more damage than necessary. Officials slowed their rate hikes last month, raising their key policy rate by a half-point in 2022 after several three-quarter-point moves. Officials forecast they would raise rates further in 2023, but their projections suggested they were close to the level at which they may stop: they looked at rates climb about 5.1 percent in 2023, up from about 4.4 percent now.

“Participants agreed that the committee has made significant progress over the past year in moving toward a substantially accommodative stance of monetary policy,” the Fed’s minutes said, referring to the rate-setting Federal Open Market Committee. But more rate moves were forecast to be needed, and no official expected a rate cut until 2023.

“Participants generally viewed that a restrictive policy stance would need to be maintained until incoming data provided confidence that inflation was on a sustained downward trajectory to 2 per cent, which was likely to take some time.” ,” Minutes said.

Officials stressed the importance of maintaining “flexibility and optionality” — lots of Fed-speak wiggle room to suddenly change its stance in a world of uncertainties.

But policy makers worried that markets could misinterpret their decision to slow the pace of the rate move, viewing it as a sign of “weakening the Committee’s resolve to achieve the price-stability goal”. , or a judgment that inflation was already making sufficient progress. slowing down. The policy works through the financial markets, and if market-based rates fall or stock prices rise, this can make it cheaper and easier to borrow.

“An undue easing of financial conditions, especially if motivated by a misconception by the public about the Committee’s response work, will complicate the Committee’s effort to restore price stability,” the minutes said.

Fed interest rate increases make it more expensive to borrow to buy a home or expand a business, which slows the economy. But their effect is not immediate: it takes time for firms to allocate less budget to hiring, for example, which can then snowball into lower power for job applicants, slower wage growth and weaker consumption.

Central bankers want to give their policy changes time to play because of this delayed response. Officials want to avoid raising rates more than necessary, especially at a time when inflation is already slowing as supply chains recover and fuel becomes cheaper.

But Fed policymakers also think inflation has entered a new phase where it won’t ease on its own once supply problems become apparent. Wages are rising so fast that firms are likely to continue raising their prices to cover rising labor bills, they think, making it difficult for inflation to normalize completely.

Officials are trying to counteract this by slowing economic demand, slowing the labor market, bringing wage gains back to normal levels and allowing inflation to settle on a sustainable basis.

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