Fed Minutes Show Officials Feared Markets’ Optimism Could Complicate Inflation Fight

Minutes of the gathering, released Wednesday, didn’t shed any light about what might prompt officials to raise rates by another 0.5 point at their meeting next month or to reduce the pace of increases once more, raising them instead by 0.25 point.

But officials flagged concerns that their effort to lower inflation could be more difficult if markets rallied, in part as evidence accumulates that inflation is slowing. The Fed’s rate-setting committee is trying to slow down spending, investment and hiring to cool inflation.

“Because monetary policy worked importantly through financial conditions, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of” how the Fed would react to new economic data “would complicate the committee’s effort to restore price stability,” the minutes said.

Officials raised their benchmark federal-funds rate by 0.5 percentage point at their Dec. 13-14 meeting, a smaller rate rise than the four consecutive prior increases of 0.75 percentage point. The move last month lifted the rate to a range between 4.25% and 4.5%, a 15-year high.

They also signaled plans to increase the rate through the spring.

The latest increase capped a year in which the Fed raised rates from near zero at the fastest pace since the early 1980s to fight inflation, which is running near a 40-year high.

In new economic projections released after the meeting, most Fed officials penciled in plans to raise the fed-funds rate to a peak level between 5% and 5.5% in 2023 and hold it there until some time in 2024. That was higher than investors’ expectations that rates might rise to just below 5%. It was also higher than what Fed officials had projected in September, when they anticipated lifting it to around 4.6% by the end of next year.

While the December rate rise was widely expected, some analysts were perplexed by how officials had revised higher their inflation projections for the coming year after some evidence that inflation may have peaked. Market-based measures of future inflation show faster declines are currently expected by many investors.

Most officials expected making somewhat less progress on reducing inflation next year than they had anticipated in September. Because central bankers believe inflation-adjusted or “real” policy rates are what matters for slowing the economy, a slower decline in inflation would require higher interest rates to achieve the same degree of economic restrictiveness.

Last month, officials projected that year-over-year core inflation, which excludes volatile food and energy categories, would fall from 4.8% in the fourth quarter of 2022 to 3.5% in the same period of this year, according to their preferred gauge, the Commerce Department’s personal-consumption expenditures price index. That was up from their projection in September that it would fall from 4.5% to 3.1%.

The core-PCE index rose 0.2% in November from October and was up 4.7% from a year earlier, suggesting inflation at the end of 2022 was possibly below officials’ most recent projections.

The Fed pays close attention to core prices as a better predictor of future inflation than overall inflation. Over the three months ended in November, core prices increased at a 3.6% annualized rate, the lowest such reading since February 2021.

Officials last month agreed that inflation data in October and November had shown “welcome reductions” in the monthly pace of price increases as supply-chain bottlenecks eased. “But they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path,” the minutes said.

Write to Nick Timiraos at [email protected]

Minutes of the gathering, released Wednesday, didn’t shed any light about what might prompt officials to raise rates by another 0.5 point at their meeting next month or to reduce the pace of increases once more, raising them instead by 0.25 point.

But officials flagged concerns that their effort to lower inflation could be more difficult if markets rallied, in part as evidence accumulates that inflation is slowing. The Fed’s rate-setting committee is trying to slow down spending, investment and hiring to cool inflation.

“Because monetary policy worked importantly through financial conditions, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of” how the Fed would react to new economic data “would complicate the committee’s effort to restore price stability,” the minutes said.

Officials raised their benchmark federal-funds rate by 0.5 percentage point at their Dec. 13-14 meeting, a smaller rate rise than the four consecutive prior increases of 0.75 percentage point. The move last month lifted the rate to a range between 4.25% and 4.5%, a 15-year high.

They also signaled plans to increase the rate through the spring.

The latest increase capped a year in which the Fed raised rates from near zero at the fastest pace since the early 1980s to fight inflation, which is running near a 40-year high.

In new economic projections released after the meeting, most Fed officials penciled in plans to raise the fed-funds rate to a peak level between 5% and 5.5% in 2023 and hold it there until some time in 2024. That was higher than investors’ expectations that rates might rise to just below 5%. It was also higher than what Fed officials had projected in September, when they anticipated lifting it to around 4.6% by the end of next year.

While the December rate rise was widely expected, some analysts were perplexed by how officials had revised higher their inflation projections for the coming year after some evidence that inflation may have peaked. Market-based measures of future inflation show faster declines are currently expected by many investors.

Most officials expected making somewhat less progress on reducing inflation next year than they had anticipated in September. Because central bankers believe inflation-adjusted or “real” policy rates are what matters for slowing the economy, a slower decline in inflation would require higher interest rates to achieve the same degree of economic restrictiveness.

Last month, officials projected that year-over-year core inflation, which excludes volatile food and energy categories, would fall from 4.8% in the fourth quarter of 2022 to 3.5% in the same period of this year, according to their preferred gauge, the Commerce Department’s personal-consumption expenditures price index. That was up from their projection in September that it would fall from 4.5% to 3.1%.

The core-PCE index rose 0.2% in November from October and was up 4.7% from a year earlier, suggesting inflation at the end of 2022 was possibly below officials’ most recent projections.

The Fed pays close attention to core prices as a better predictor of future inflation than overall inflation. Over the three months ended in November, core prices increased at a 3.6% annualized rate, the lowest such reading since February 2021.

Officials last month agreed that inflation data in October and November had shown “welcome reductions” in the monthly pace of price increases as supply-chain bottlenecks eased. “But they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path,” the minutes said.

Write to Nick Timiraos at [email protected]