Fed Minutes Confirms Fed Could Follow Through With Additional Tightening

The minutes from the October 31-November 1, 2023 Federal Open Market Committee (FOMC) meeting acknowledged the disinflationary process, but reiterated that curtailing inflation is the Fed’s principle objective.

On the strength of the economy, Committee members noted that “real GDP had expanded at an unexpectedly strong pace in the third quarter, boosted by a surge in consumer spending. Nevertheless, participants judged that aggregate demand and aggregate supply continued to come into better balance, as a result of the current restrictive stance of monetary policy and the continued normalization of aggregate supply conditions.” Additionally, Committee members continued to expect that a period of below potential growth and softening labor market conditions would be required to return inflation to target.

When discussing the recent tightening in financial conditions participants noted that, “persistent changes in financial conditions could have implications for the path of monetary policy and that it would therefore be important to continue to monitor market developments closely.” Since the FOMC met, the yield on the 10-Year Treasury has come in about 30 basis points, but remains substantially higher than at the time of the last hike in late July.

When discussing the appropriate policy actions, “all participants judged it appropriate to maintain the target range for the federal funds rate at 5¼ to 5½ percent at this meeting.” Furthermore, all participants stated that it would be appropriate to maintain policy at a restrictive position until there is clear evidence that inflation is on a sustainable path to its 2% target.

Regarding additional rate hikes, Committee members noted that “further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee’s inflation objective was insufficient.”

Key Implications

Today’s minutes confirmed that the Fed has not closed the door on a final rate hike. While the Fed has made notable progress in curtailing inflation, Chair Powell has stated that the fight against inflation “has a long way to go”. This sentiment has been echoed by multiple FOMC members. With the risks in returning inflation to target becoming more balanced, the Fed will take a calculated approach in calibrating its policy stance to a sufficiently restrictive position.

While economic activity has remained resilient throughout 2023, data prints since the FOMC meeting have pointed to early signs that economic momentum may be moderating from the breakneck pace set in the third quarter. Yields have also given back a fair bit since the meeting, undoing some of the tightening in financial conditions. Given the persistent strength in economic activity, we believe another hike by the Fed cannot be ruled out.