The minutes from the Jan. 31-Feb. 1, 2023 Federal Open Market Committee (FOMC) meeting showed that the Fed remains committed to bringing inflation back to target.
On the progression of the economy, the Committee members noted that “recent indicators pointed to modest growth in spending and production. Nonetheless, job gains had been robust in recent months, and the unemployment rate remained low. Inflation had eased somewhat but remained elevated.”
The minutes showed that “almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting.” Members that supported a 50-basis point increase believe that a larger increase would more quickly get them to a sufficiently restrictive position to enable achieving price stability in a timely way.
On the future path of monetary policy, committee members anticipated that “ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives.” Moreover, that it is important to maintain a restrictive stance until there is clear evidence that inflation is moving toward the Fed’s 2% target.
Today’s minutes confirmed that further rate hikes are on tap, and will largely depend on incoming data. While the disinflationary process has begun, January’s CPI print shows that the Fed has more work to do to get inflation on a sustainable path towards its 2% target. This sentiment has been echoed by multiple Fed members and is reflected in the U.S. 2-year Treasury yield, which has increased by 58 basis points since the beginning of February.
A host of stronger-than-expected data releases to begin the year has undoubtedly caught the attention of the Fed. Financial markets have also adjusted their view of the future path of rates upward. Economic momentum is expected to slow in 2023 as the full impact of the Fed’s historic rate increases weighs. Recession fears refuse to abate, with the Fed acknowledging the risk. We expect the Fed will continue to raise rates to a peak of 5.25%, before pausing to assess the impact of its actions on the economic backdrop.