Federal Reserve determined to ‘proceed carefully’ on inflation policy

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Federal Reserve officials agreed in September that the US central bank should “proceed carefully” on interest rate decisions, while acknowledging that monetary policy should remain restrictive for some time, according to minutes from their latest meeting.

Members of the Federal Open Market Committee sounded a cautious note, saying there were “two-sided” risks in pursuing its 2 per cent inflation target. Officials did not raise interest rates at the meeting.

At the time of the meeting, officials were leaning towards the likelihood of another rate increase. A “majority” of participants suggested another increase might be appropriate, and “some” said no further raises were warranted, the minutes said.

But those impressions came before a sell-off in Treasury debt over the past two weeks, which has led some central bank officials to suggest that the rise in borrowing costs may have in effect tightened policy for the Fed.

Fed governor Christopher Waller said at an event on Wednesday that “financial markets are tightening up and they are going to do some of the work for us”.

References to proceeding carefully appeared twice in the minutes. “All participants agreed that the committee was in a position to proceed carefully,” the minutes said, noting that officials would continue to make decisions based on the “totality” of incoming information.

They also said that “data volatility and potential data revisions, or the difficulty of estimating the neutral policy rate” supported the case for “proceeding carefully in determining the extent of additional policy firming that may be appropriate”.

The word “carefully” did not appear in the July minutes.

While minutes from the July meeting mentioned “two-sided” risks, the language in the September minutes suggested that officials had since adopted that view more broadly.

The two-sided risks refer to both the risk of tightening policy either too little — which would leave inflation at higher levels — or too much — which threatens to curb economic growth dramatically.

Still, officials acknowledged that policy “should remain restrictive for some time until the committee is confident that inflation is moving down sustainably toward its objective”.

The pause in interest rate increases in September left the Fed’s benchmark rate in a range of 5.25-5.5 per cent, the highest level since 2001. That is slightly below the year-end levels forecasted by most officials in their September dot-plot projections.

Market reactions to the release of the minutes were minimal.

The Fed’s meeting reflects officials’ views prior to the recent Treasury market sell-off. Yields on 10- and 30-year bonds reached their highest levels in 16 years last week, as investors coalesced around the view that US growth may be stronger than expected in the coming quarters, and that the Fed was likely to keep interest rates at high levels for longer.

The rise in yields hit stocks and sent financial conditions to the tightest levels in a year. Since then, officials including Waller have spoken about the need to take the rise in yields into consideration while developing monetary policy.

Fed vice-chair Philip Jefferson on Monday said that he would “remain cognisant of the tightening in financial conditions through higher bond yields” when assessing the path for interest rates. That sentiment was echoed by Dallas Fed president Lorie Logan on the same day, and Minneapolis Fed president Neel Kashkari on Tuesday.

Also on Tuesday, Atlanta Fed president Raphael Bostic said the central bank did not need to raise interest rates further and said he was not expecting the US to enter a recession in the near term.