U.S. Federal Reserve officials have cautioned that there may be further rate hikes in the future, despite their decision to keep the benchmark federal funds rate unchanged at a recent meeting. Three policymakers expressed uncertainty about whether the battle against inflation has been won. However, they also acknowledged that the pace of price increases has been slowing.
While the central bank agreed to maintain its benchmark rate within a range of 5.25% to 5.50%, the focus of their first public comments since the meeting was on the possibility of future rate increases. They also emphasized that monetary policy is likely to remain tight for a longer period than previously anticipated.
Fed Governor Michelle Bowman stated that inflation is still too high and expects that it will be necessary for the Committee to raise rates further and maintain them at a restrictive level to achieve the 2% inflation goal. She noted that inflation is projected to remain above the target until at least the end of 2025, with a potential risk of further increases in energy prices.
Boston Fed President Susan Collins, speaking to the Maine Bankers Association, acknowledged that further tightening of monetary policy is still a possibility. However, she also emphasized the need for patience in interpreting inflation data, which can sometimes be noisy. Collins expressed uncertainty about whether inflation is on a sustainable trajectory back to the 2% target, citing above-trend job growth and elevated inflation in certain service sectors as ongoing concerns. She also suggested that rates may need to stay higher and for a longer period than previously projected.
San Francisco Fed President Mary Daly, known for her more dovish stance, stated that she requires more data to determine whether interest rates should rise again. However, she believes it is prudent for the Fed to exercise patience in future rate decisions. Daly cautioned against prematurely declaring an end to rate hikes without sufficient information.
Minneapolis Fed President Neel Kashkari did not discuss his current monetary policy views but noted that the economy appears to be performing well despite the rapid rate hikes implemented since March 2022. He highlighted that consumer spending continues to exceed expectations, even with significant interest rate increases.
The decision to keep the benchmark overnight interest rate unchanged was unanimous among the central bank officials. Bowman supported this decision due to mixed data, which showed signs of solid economic growth alongside some decline in inflation and slowing job growth. Collins and Daly, who are not currently voting on rate policy, did not have a say in this decision.
New projections released after the policy meeting indicated that 12 out of 19 Fed officials expect one additional quarter-point rate increase this year. The Fed has two more scheduled sessions in 2023. Notably, officials projected a slower path for reducing interest rates next year compared to previous expectations. The median projection now suggests a half percentage point decline in rates in 2024, as opposed to the full percentage point decline projected in June.
In conclusion, U.S. Federal Reserve officials have expressed caution about the possibility of further rate hikes, emphasizing the need for patience and continued monitoring of inflation data. They believe that inflation remains a concern and that monetary policy may need to remain tight for a longer period. The decision to keep rates unchanged was unanimous, with officials acknowledging mixed economic data. Projections indicate a slower pace of rate cuts in the future.
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