U.S. Federal Reserve policymakers expected interest rates may need to be raised slightly higher starting at their September meeting, according to freshly released meeting minutes. But they were also determined to move forward cautiously, fearing they might overdo it and put too much pressure on the economy.
Officials left interest rates unchanged at their meeting on September 19 and 20 after raising them sharply since March 2022. Interest rates are now at 5.25 to 5.5 percent, up from near zero 19 months ago.
Even though policymakers kept borrowing costs stable last month, they forecast they may need to raise rates again in 2023. They also estimated that they would keep interest rates high for a long time and only lower them slightly next year. Because higher Fed interest rates make it more expensive to borrow to buy a home or expand a business, these higher costs are expected to gradually cool the economy and help central bankers curb demand and bring inflation under control.
But Fed officials are increasingly concerned that they may be overdoing their campaign to slow economic growth. Inflation has begun to moderate, and central bankers do not want to pressure the economy so aggressively that it leads to a rise in unemployment or a collapse in financial markets.
“Participants generally noted that it was important to balance the risk of over-tightening against the risk of insufficient tightening,” the minutes released Wednesday said.
The economy has so far proven very resilient to higher interest rates. Even though Fed officials have raised their key interest rate to their highest level in 22 years, consumers continue to spend money and companies continue to hire. The September jobs report showed that employers added far more workers last month than economists had expected.
That staying power has led policymakers and Wall Street alike to hope that the Fed might be able to create what is often called a soft landing, gently cooling the economy and lowering inflation without hurting growth to slow down and drastically increase unemployment.
However, soft landings are historically rare and officials remain cautious about the risks to the outlook. Fed officials identified the autoworker strike as a new risk to the economy that has the potential to both boost inflation and slow growth, the minutes show. They also saw rising gasoline prices as something that could make it harder to control inflation. At the same time, they noted that a slowdown in China could cool global growth, noting that stress in the banking sector could also pose a hurdle for the economy.
There is also the possibility that the economy will not slow enough to allow inflation to subside completely.
At the September meeting, “a majority” of Fed officials believed another rate hike was needed, while “some” thought rates probably wouldn’t need to be raised again.
Since then, longer-term interest rates in the markets have risen significantly. This has raised doubts among investors that officials will actually implement a final rate hike.
Fed policymakers themselves have signaled that they may not need to raise interest rates further as higher borrowing costs in markets will help slow the economy.
Christopher J. Waller, a Fed governor who often supports higher interest rates, said at an event on Wednesday that officials were able to “watch and see” what was happening and that they could monitor the movement and “how “We would be watching these higher interest rates very closely.” These higher interest rates will be factored into what we do with policy in the coming months.”
Comments are closed.