The minutes from the September 19-20, 2023 Federal Open Market Committee (FOMC) meeting underscored the Fed’s commitment to curtailing price pressures.
On the economic outlook, Committee members noted that “that real GDP had been expanding at a solid pace and had been more resilient than expected. Nevertheless, participants also noted that they expected that real GDP growth would slow in the near term. Participants judged that the current stance of monetary policy was restrictive and that it broadly appeared to be restraining the economy as intended.” Additionally, participants continued to anticipate that a period of below trend growth would be needed to return inflation to its 2% target.
On debating the appropriate policy actions, “almost all participants judged it appropriate to maintain the target range for the federal funds rate.” A more cautious approach would better allow the Committee the cumulative effects of previous tightening on economic activity.
When discussing future interest rate hikes, the “majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted.” Moreover, all participants stressed the importance of maintaining a restrictive policy stance until there is strong evidence that inflation is moving back to target.
Concerning the risks of additional rate hikes, committee members noted that “risks to the achievement of the Committee’s goals had become more two sided.” The Committee noted the potential for a larger-than-anticipated lagged impact on economic activity from tightening financial conditions.
Key Implications
Today’s minutes confirmed that the Fed has kept another rate hike in play as economic activity continues to be buoyant underscored by strength in the labor market. This has been reflected in an expected shallower path of rate cuts. While inflation has been trending in a favorable direction, near-term inflation expectations have inched higher in recent months and will have the Fed attentively monitoring upside risks to inflation when calibrating policy to a restrictive level that balances the risks of doing too much versus doing too little.
With economic activity remaining strong, the Fed is likely to move forward with an additional rate hike and maintain rates at a restrictive level until there is clear evidence that inflation is on a sustainable path to its 2% target. The one risk to this view is the sharp tightening in financial conditions experienced over the past several weeks, highlighted by a rise in long-term treasury yields. Should this continue, it may give the Fed reason to pause.
