The vast majority of Federal Reserve officials supported slowing the pace of US interest rate rises to 0.25 percentage points last month, according to an account of their most recent meeting that showed the central bank is still determined to bring inflation back to target.
Heading into the meeting, some investors were concerned the minutes from the Federal Open Market Committee would show deepening divisions among policymakers over whether the central bank was right to shift down to a more typical 0.25 percentage point rate increase in February after a string of larger rises.
However, the minutes from the February meeting showed “almost all” participants agreed it was appropriate to raise rates by 0.25 percentage points, even though “a few” said they would have preferred a 0.5 percentage point increase or could have been persuaded to support one.
Against the backdrop of inflation that is still well above the Fed’s 2 per cent goal as well as a very tight labour market, “all participants” said they thought “ongoing” increases in the central bank’s benchmark rate would be needed to bring inflation under control.
“Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 per cent, which was likely to take some time,” according to the minutes.
The quarter-point increase last month marked a return to a more typical pace of tightening for the Fed, which last year increased rates from near zero to more than 4 per cent via a series of jumbo 75bp and 50bp rises.
As inflation began to show signs of cooling, the central bank slowed the pace of its increases in response. But officials also said that insufficiently restrictive policy could “halt” recent progress in moderating inflation, and “pose a risk of inflation remaining unanchored”.
Jonathan Cohn, head of interest rate trading strategy at Credit Suisse, said the minutes pointed to a reduced likelihood of a half-point rate rise at the Fed’s March meeting.
“It seems like the majority of the committee is in line with [Jay] Powell,” said Cohn, referring to the Fed chair. “I think market pricing will still be data-dependent, but the bar for a reacceleration towards 0.5 percentage points is high.”
The initial market reaction to the minutes was muted, with stocks slightly up on the day, and a modest increase in the two-year Treasury yield, which moves with inflation expectations.
Since the meeting, the economic picture has changed significantly, with reports on job creation, consumer price inflation and retail sales all suggesting that persistent price pressures are far from falling away.
The January payrolls report, released two days after the Fed’s meeting, showed that US employers had added more than half a million jobs, nearly triple what economists had forecast, while the unemployment rate hit 3.4 per cent, its lowest level in 53 years. Although the report showed that wage growth had slowed, a tight labour market has historically forced employers to raise wages and potentially push inflation higher.
A smaller than expected fall in the consumer price index for January compounded fears about persistent inflation, with notable price pressures still evident in sectors including housing.
Some investors and economists believe the Fed will keep rates higher for longer in light of the recent data.
“We’re seeing growth moderate slightly but very very slowly, suggesting the Fed’s job is not yet done,” said Gennadiy Goldberg, a strategist at TD Securities.
Since the meeting, two Fed officials, Cleveland Fed President Loretta Mester and St Louis Fed President James Bullard, said they would have supported a larger 50bp rate increase at the time. However, neither Mester nor Bullard are voting members of the committee.
The recent spate of strong US data has brought market expectations of the Fed’s path for the remainder of the year more in line with the central bank’s own forecasts.
While Fed officials have been clear they do not expect to cut rates this year, investors had been banking on at least two 25bp reductions by the end of 2023, but those expectations have dissipated in recent weeks.
Despite the majority of Fed officials backing February’s quarter-point rate rise, Eric Theoret, global macro strategist at Manulife Investment Management, said the fact that the committee had even debated whether to raise rates by a half-point was significant.
“Coming out of the meeting, we had the step down to a quarter-point and Jerome Powell talking about disinflation,” he said. “It looks with these minutes like the Fed is messaging here to say they should have mentioned the half versus quarter-point debate then.”
