Fed Officials Fretted That Markets Would Misread Rate Slowdown

That’s why the Fed wants to tread carefully, bringing price increases under control without inflicting more damage than necessary. Officials slowed their rate increases last month, lifting their main policy rate by half a point after several three-quarter-point moves in 2022. Officials forecast that they would raise rates by more in 2023, but their estimates suggested that they were nearing the level at which they might pause: They saw rates climbing to about 5.1 percent in 2023, from about 4.4 percent now.

“Participants concurred that the committee had made significant progress over the past year in moving toward a sufficiently restrictive stance of monetary policy,” the Fed’s minutes said, referring to the rate-setting Federal Open Market Committee. But more rate moves were judged to be needed, and no officials expected to cut rates in 2023.

“Participants generally 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 percent, which was likely to take some time,” the minutes said.

Officials emphasized the importance of retaining “flexibility and optionality” — Fed-speak for wiggle room to change their stance abruptly in a world of many uncertainties.

But policymakers worried that markets might misinterpret their decision to slow the pace of rate moves, seeing it as a sign of a “weakening of the committee’s resolve to achieve its price-stability goal,” or a judgment that inflation was already making enough progress in slowing down. Policy works through financial markets, and if market-based rates dip or stock prices soar, that can make it cheaper and easier to borrow.

Article source: https://www.nytimes.com/2023/01/04/business/economy/inflation-markets-fed.html