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Fed minutes: Cost of doing too little outweighs cost of doing too much

Several Fed officials felt that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action, according to the minutes of discussions among Fed officials at their policy meeting three weeks ago, echoing recent public statements.

"While the minutes provided some hints that Fed officials are beginning to lay the ground for a slower pace of rate hikes eventually, the overall tone was still hawkish, suggesting that the Fed will push ahead with another 75bp hike at the November meeting," Capital Economics Senior US economist Michael Pearce wrote in a note.

Participants felt the need to maintain a restrictive stance for as long as necessary, with a couple stressing that historical experience showed the danger of prematurely ending periods of tight monetary policy designed to bring down inflation.

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At the time, Fed officials felt inflation remained “unacceptably high,” noting that inflation data had come in above expectations and was declining more slowly than anticipated. Several participants noted the continued elevated rates of increase in core goods prices — prices excluding volatile food and energy.

Fed officials still felt that the job market remained “very tight” and that softening was needed to ease wage pressure and prices, though some noted the job market moving into better balance given a lower rate of job turnover and increase in labor force participation rate. Several thought that the transition would occur primarily through reduced job vacancies and slower job creation.

Most officials feel that while some interest rate sensitive sectors like housing and business fixed investment have started to respond to rate hikes, a large portion of the economy hasn't yet.

Federal Reserve Board members listen to introductory remarks by Federal Reserve Board Chairman Jerome Powell an event on
Federal Reserve Board members listen to introductory remarks by Federal Reserve Board Chairman Jerome Powell an event on "Fed Listens: Transitioning to the Post-pandemic Economy" at the Federal Reserve in Washington, U.S., September 23, 2022. REUTERS/Kevin Lamarque

As monetary policy tightens further, officials think they can slow the pace of rate hikes at some point and assess the impact of rates hikes that have already been implanted on inflation.

Once the policy rate had reached a sufficiently restrictive level, the minutes indicated, they would maintain that level for “some time” until there was “compelling” evidence that inflation was on course to return to the 2 percent objective.

The Fed expects the economy to grow below trend this year and the next few years, with unemployment rising, given the impact of rate hikes. Officials are also watching global headwinds, including the heightened risk of recession in Europe, a slowdown in China’s economy, and the economic implications of Russia’s war against Ukraine.

The Fed raised rates by three quarters of a percentage point three weeks ago to a range of 3%-3.25%, marking the third rate hike of that size in a row.

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