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Fed Officials Believed Rates Could Increase Further if Inflation Persisted

Federal Reserve officials are considering the possibility of raising interest rates again in order to moderate the economy and ensure that rapid inflation fully subsides. The minutes from the central bank’s Oct. 31-Nov. 1 meeting, released on Tuesday, outlined the discussion around this issue.

According to the minutes, “Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the committee’s inflation objective was insufficient.” Fed officials believed that the data in the coming months would provide more clarity on the ongoing disinflation process.

The central bankers voted to keep interest rates unchanged in a range of 5.25 to 5.5 percent at their early-November meeting, allowing for more time to assess the impact of their previous rate adjustments on demand.

The focus on Wall Street is now on what actions the officials will take next. While the Fed had predicted one more rate move in 2023 as of their September economic projections, investors believe there is a low probability of a rate hike at the final meeting of the year on Dec. 12-13. The recent minutes may reinforce the expectation of an extended pause, as officials indicated that they intended to monitor the economy’s performance over the “months.”

Observers are now trying to ascertain whether officials have definitively completed the process of raising interest rates. Additionally, they are interested in knowing when the officials are likely to begin cutting rates. Policymakers will be publishing a new set of quarterly economic forecasts after their December meeting, which, along with comments from Fed Chair Jerome H. Powell, could provide valuable insights into the future direction.

As of September, the policymakers anticipated lowering rates before the end of 2024. If this forecast holds and Mr. Powell indicates that policymakers are not eager to raise rates again, investors may shift their focus to the timing of rate cuts. Currently, market pricing indicates the expectation of interest rate reductions in the first half of 2024.

However, if the December economic projections suggest that rates could remain higher for a longer period, or if Mr. Powell hints at a potential rate increase next year, it could keep the possibility of further action alive. Several central bankers have indicated in recent weeks that they are uncertain whether they have completed the process of raising interest rates.

Susan Collins, the president of the Federal Reserve Bank of Boston, stated in a CNBC interview last week, “I wouldn’t take additional firming off the table.”

The minutes from the Fed’s November meeting provided insight into the policymakers’ outlook. While officials are keen to ensure that they are sufficiently cooling the economy to bring inflation back to their 2 percent target in a prompt manner, they also want to avoid excessive tightening that could lead to a painful recession.

The minutes indicated that Fed officials believed that “with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided,” although “most participants continued to see upside risks to inflation.”

Consumer Price Index inflation decreased to 3.2 percent in October, down from a peak above 9 percent in the summer of 2022. Nonetheless, officials remain concerned that fully bringing inflation back to normal levels could be challenging.

Fed officials use a separate but related measure, the Personal Consumption Expenditures index, to define their inflation target, and the October P.C.E. figures are set for release on Nov. 30.

As officials are trying to determine the likelihood of fully controlling inflation, they are carefully monitoring the strength of the job market and the overall economy. If the economy continues to exhibit strong performance, with robust consumer spending and businesses aggressively hiring workers, companies may continue to raise prices at a faster pace than usual.

Since their last meeting, the Fed has received some positive news. While employers continued to add jobs in October, the pace of hiring slowed significantly, with just 150,000 workers being hired and downward revisions to earlier hiring figures.

The minutes indicated that policymakers are looking for signs that “labor markets were reaching a better balance between demand and supply.”

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