Fed officials remain hawkish on inflation despite recessionary fears

The minutes of last month’s Fed meeting, released yesterday (4 January), revealed that central bank officials felt they need to see “substantially more evidence” of inflationary decline before pulling back on monetary tightening.

At a meeting where policymakers raised their key interest rate another half percentage point following the news that inflation remained high at 7.1%, Fed officials emphasised “the need to retain flexibility and optionality” on future monetary policy.

After the meeting on 15 December, Fed chair Jerome Powell indicated that while some progress had been made against inflation, he was still pessimistic, expecting rates to remain high even after hikes cease.

Yesterday’s minutes reflect that sentiment, noting that no Fed committee members foresee rate cuts this year, despite market pricing.

The minutes read: “A number of participants emphasised that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”

Fears of a two-pronged risk are ultimately front of mind for Fed members, with one worry that rates are not hiked fast enough and inflation is allowed to fester, while another sees hikes slowing the economy too much, “potentially placing the largest burdens on the most vulnerable groups of the population.”

However, the minutes made clear the former is still seen as most likely by committee members.

“Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy,” it said. “Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2% is appropriate from a risk-management perspective.”

Nigel Green, CEO of deVere Group, said the minutes “dash yet more hopes” for an economic soft landing.

He continued: “With the labour market not cooling as fast, there seems to be a considerable turnaround in tone from the more dovish minutes in November.

“The tone of the minutes indicate the Fed is not yet ready to pivot as the central bank believes risks for inflation remain to the upside and they will keep tightening until more substantial progress is made on bringing it back closer to target.”

Meanwhile, the International Monetary Fund ramped up pressure on the Fed to continue tightening, with the organisation’s deputy managing director arguing the central bank must “stay the course” on inflation.

In an interview with the Financial Times today, Gita Gopinath argued that inflation in the US had not “turned the corner yet,” with a tight labour market and service inflation continuing to persist.

Gopinath concluded that it was “important” for the Fed to “maintain restrictive monetary policy,” until a “very definite, durable decline in inflation” was observed in wages and core inflation.