Fed Minutes Show Continued Concern About Inflation, Plans to Keep Raising Rates

While acknowledging that inflation is showing some signs of improvement, members of the Federal Reserve nonetheless believe there is a need for continued increases in interest rates this year, minutes of the most recent Federal Reserve meeting released Wednesday show.

The Fed raised rates by 25 basis points at its late January meeting, but “a few participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance , taking into account their views of the risks to achieving price stability in a timely way,” the minutes said.

The minutes revealed continued concern about inflation and the strength of the labor market but did not reveal any real change in the narrative around Fed actions.

Prices are still rising at a pace “well above” the Fed’s 2% annual average target and the labor market “remained very tight, contributing to continuing upward pressures on wages and prices,” the minutes said.

The Fed is widely expected to raise interest rates again by 25 basis points when it meets next month, but St. Louis Federal Reserve President James Bullard told CNBC on Wednesday he favors a half-percentage point increase.

Bullard and Cleveland Fed President Loretta Mester have both said they pushed for a 50-basis-point increase at the January meeting. Since then, economic data has come in a bit better than expected and inflation readings have shown a month-to-month increase even as the annual pace of inflation has fallen.

There is a fear in some circles and among market interests that while the Fed can tame inflation there is also the risk it could reignite if the economy and labor market shows continued resilience. Although prices of goods have fallen and the housing market has buckled under rising mortgage rates, the services sector of the economy is still showing signs of growth and wage inflation.

Fed Chairman Jerome Powell has at times suggested that the process of disinflation has begun while also insisting the central bank is far from done with its jobs of bringing inflation down to its 2% annual goal. That has led to a belief the Fed may ultimately settle for a higher inflation rate in the short term while maintaining interest rates at a more elevated level for longer.

“Overall, the Fed has become extremely ‘hawkward,'” Gene Goldman, chief investment officer for Cetera Financial, said ahead of the minutes’ release. “They remain hawkish in their focus to fight inflation, yet they have been pretty awkward in their message delivery.”

It has long been noted that adjustments to monetary policy come with a “lag effect,” but the trillions of dollars of fiscal and monetary stimulus Washington approved to fight the effects of the coronavirus in 2020 and 2021 also have not fully made their way through the economy, providing some residual benefits to consumers even in 2023.

“Spending growth was broad based,” economic analysts Kayla Bruun and Sofia Brag wrote. “Not only did services categories continue to benefit from consumers’ reallocation of budgets toward these categories in the wake of the pandemic, but goods categories also registered a boost in purchases.”

The uncertain situation is not limited to the US economy. After saying for months that the Eurozone economies would fall into recession because of the Russian invasion of Ukraine and disruptions to the energy supply, economists now believe that Europe will escape recession, at least this year.

Warmer weather has helped blunt the impact of a shutdown in gas exports from Russia, while economic growth in the regions has surprised to the upside.

“The news has become much more positive in the last few weeks,” European Central Bank President Christine Lagarde said last month.