Financial basis

Fed officials pledge to apply restrictive rates but say calibration is needed

(Bloomberg) – Federal Reserve officials have pledged to raise interest rates to a restrictive near-term level and hold them there to bring inflation back to their target, though several said it would be important to calibrate upside to mitigate risk.

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“Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on economic outlook,” according to the minutes. of their Sept. 20-21 rally released Wednesday in Washington.

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During the meeting, US central bankers agreed to raise the benchmark lending rate by 75 basis points for the third consecutive time, bringing it to a target range of 3% to 3.25% as they fight stubborn inflationary pressures.

“Many participants stressed that the cost of taking too little action to reduce inflation likely outweighed the cost of taking too much action,” the minutes showed.

US stocks fluctuated after the release, while Treasury yields remained lower and the dollar was little changed. Traders maintained their bets that the Fed will raise rates again next month by 75 basis points.

The minutes show a committee united in bringing inflation back to the Fed’s 2% target, while several policymakers urged caution as interest rates reached restrictive territory.

Aggressive hikes

Criticized by critics for being slow to react to mounting price pressures, the Fed launched the most aggressive tightening campaign since the 1980s. Starting with rates near zero in March, it rose 300 basis points and signals that more are to come.

Fed officials plan to raise rates to 4.4% by the end of the year, according to their median estimate released last month, and 4.6% in 2023.

This has an economic cost: rising borrowing costs are expected to slow growth to 1.2% next year and push the unemployment rate to 4.4%. It was 3.5% in September.

“Several participants observed that as policy moves into restrictive territory, the risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative contraction in aggregate demand would exceed what was needed to bring inflation back to 2%,” the minutes state. show.

above target

Inflation, as measured by the Fed’s preferred gauge, has exceeded the central bank’s 2% target for more than a year, testing public confidence in officials’ ability to bring it down.

“They agreed that by deliberately steering its policy towards an appropriately restrictive stance, the committee would help ensure that high inflation does not become entrenched and that inflation expectations do not become unanchored,” the lawsuit states. verbal.

Rapidly rising borrowing costs have dampened real estate activity, but other sectors of the economy are showing resilient demand.

Employers added 263,000 jobs in September and a consumer inflation report showed prices rose 8.3% in the 12 months to August. September’s consumer price index, due on Thursday, is expected to post a still rapid 8.1% rise, with core inflation expected to return to its highest level in four decades.

(Updates with markets in fifth paragraph.)

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