The Fed Will Keep Raising Interest Rates, Their Latest Minutes Show

The Federal Reserve will continue to raise interest rates, according to the minutes of the latest Policy Committee meeting (January 31-February 1, 2023). They did not provide an ultimate interest rate target, but “…all participants continued to believe that continued increases in the target range for the federal funds rate would be appropriate to meet the Committee’s objectives.”

Decisions about interest rates and Federal Reserve assets are made by the Federal Open Market Committee, which consists of the seven members of the Federal Reserve Board and the 12 regional bank governors. Only four of these presidents have a vote, which they rotate, but all participate in the discussions.

The Fed is increasingly adopting a so-called “risk management perspective”. They acknowledge uncertainty: “Participants noted that uncertainty related to their outlook for economic activity, jobs and inflation was high.” More than in the past, the Fed is considering the possibility that it is making a mistake .

They weigh the costs of too high interest rates versus the costs of too low interest rates: “Some participants noted the importance of keeping longer-term inflation expectations anchored and noted that the longer inflation persists, the greater the risk inflation expectations are dissolving. In this unfavorable scenario, it would be more expensive to bring inflation down to meet the Committee’s statutory targets for maximum employment and price stability.”

This issue is driving Federal Reserve policy more than any other issue this year. Financial market analysts and public policy commentators look at inflation drivers to gauge optimal policy, and they sometimes wonder why the Fed isn’t following what appears to be optimal policy. The main motive that motivates them is that the Fed believes that a mistake that leads to persistent inflation is much, much worse than a mistake that leads to a recession. That’s because they will ultimately drive down inflation. But bringing down inflation after a temporary spike is much easier than bringing down inflation that everyone expects to stay at high levels. Historical experience in the United States and around the world supports this conclusion.

Although the FOMC minutes do not specify exactly how high interest rates are being pushed, at that meeting “some participants stated that at this meeting they would support a 50 basis point hike in the federal funds rate target range or that they would like to raise the federal funds rate can support target by that amount.”

In short, we should expect the Fed to hike rates further, likely by another full percentage point from the current 4.5%.

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