Fed officials said rates could remain high ‘for some time’

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Most Federal Reserve officials want to keep borrowing costs high “for some time”, adding to doubts that the US central bank is poised to begin cutting interest rates as early as March.

Officials expressed growing optimism that the Fed was succeeding in its quest to quell inflation, according to minutes of their December meeting released on Wednesday, but were careful not to commit to an immediate loosening of monetary policy.

Officials surprised markets in December by indicating they expected the bank to cut by a quarter-point three times over the course of 2024. The minutes showed that while most rate-setters expected to cut this year, there was “an unusually elevated degree of uncertainty” in the outlook for the economy.

The readout from the meeting said it was possible that a deterioration in the data could make further rate increases “appropriate”, despite most officials viewing rates “as likely at or near [their] peak”. 

“Participants generally stressed the importance of maintaining a careful and data-dependent approach to making monetary policy decisions and reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee’s objective,” the account said. 

Despite their caution on rates, policymakers sounded more confident on inflation, saying it was “moving toward greater balance”. An earlier reference from previous minutes to inflation remaining “unacceptably high” was removed. 

Investors appeared unsurprised by the account in the Federal Open Market Committee minutes. Yields on the US government’s benchmark 10-year bond were 0.01 percentage points lower at 3.93 per cent, while the policy-sensitive two-year yield edged 0.03 percentage points higher to 4.36 per cent. Bond yields rise as their prices fall.

In equity markets, the S&P 500 slightly extended an earlier decline to trade 0.6 per cent lower. The technology-heavy Nasdaq Composite index was down 0.9 per cent.

Futures markets continued to price in roughly six interest rate cuts for 2024 as a whole, despite the Fed’s official “dot plot” projections indicating just three cuts.

The record comes as Fed watchers continue to debate when the bank will begin lowering borrowing costs in 2024 and how deeply it will cut rates through the year.

The dovish tone of the December meeting and chair Jay Powell’s comments immediately after it led many investors to bet that cuts could start as soon as March.

Ahead of the publication of the minutes, the market was pricing in six quarter-point cuts this year, despite warnings from FOMC officials since the meeting that a move to slash rates was far from a done deal.

On Wednesday, Richmond Fed president Thomas Barkin, a voting member of the FOMC this year, warned that the quest to beat back inflation was not complete, saying that some companies did not yet “want to back down from raising prices until their customers or competitors force their hands”.

“If that’s the case, I fear more will have to happen on the demand side, whether organically or through Fed action, to convince price-setters that the inflation era is over,” he said, adding that a soft landing was “increasingly conceivable” but “in no way inevitable”.

Barkin’s comments pushed yields on 10-year Treasuries above 4 per cent for the first time since the December meeting, although the move had largely reversed by midday in New York.

Bond prices have started 2024 on the back foot following a strong year-end rally that pushed the benchmark 10-year yield as low as 3.78 per cent last week, spurred by the Fed’s unexpectedly dovish tone at the meeting.

On Wednesday, federal data showing that job openings in November fell to the lowest level in more than two years offered some evidence of cooling in the labour market, bolstering expectations of rate cuts.

December’s decision from the central bank left the federal funds rate at 5.25-to-5.5 per cent — a 22-year high reached after a series of increases aimed at curbing the most significant bout of inflation in decades. However, price pressures declined sharply over the second half of 2023 and the Fed has not raised rates since July.

The resilience of the US economy last year, as inflation fell despite strong growth and low unemployment, has raised hopes of a soft landing.

The FOMC’s December projections showed most officials expected rates would end 2024 between 4.5 per cent and 4.75 per cent. Most officials expect rates to fall farther in 2025, ending the year between 3.5 per cent and 3.75 per cent.

Those “dot-plot” projections are built on the core Personal Consumption Expenditures index falling to 2.4 per cent this year and 2.2 per cent in 2025, before hitting the central bank’s 2 per cent goal in 2026. Unemployment is expected to tick up only slightly, from 3.8 per cent now to 4.1 per cent.

Some economists and investors still disagree on how quickly the Fed will move this year, especially after expectations of rate cuts sparked a rally in equities and government bonds, pushing down yields and lowering the cost of capital for businesses.

Additional reporting by Jennifer Hughes in New York