Fed minutes to detail the debate over the end game to raise interest rates

WASHINGTON (Reuters) – Minutes from the Federal Reserve’s latest meeting on Wednesday are expected to detail a widening debate at the US central bank over whether additional interest rates need to rise to slow inflation and cool the economy. It remained stronger than expected despite monetary policy tightening.

31 Jan – Feb. The first meeting ended with the Fed raising the benchmark interest rate by a quarter of a percentage point, a return to the size of a larger benchmark rate hike after a year of sequential increases of 75 and a half percentage points.

In a news conference after the end of that meeting, Fed Chairman Jerome Powell said a return to smaller interest rate hikes would allow for a more gradual pursuit of a potential stopping point, and that officials spent the session “talking a little bit about the path forward” as the central bank narrows down what might be The end of the hiking course.

But that session was also held before the release of headline data that showed extraordinarily strong job gains in January, and less sluggish inflation than expected — a trend that is expected to continue this week with the release of a report on Friday on how the Fed favors inflation. The index succeeded in January.

The central bank uses the PCE price index in setting its inflation target of 2%. Economists polled by Reuters estimate that personal consumption expenditures excluding the more volatile food and energy components rose at an annualized pace of 4.3% last month, a slight improvement from the 4.4% jump in December. But on a monthly basis, this core measure of inflation is indeed expected to rise to 0.4% from 0.3% in the prior period.

“The news has just been that the US economy is stronger than we previously thought… Our risk now is that inflation is not declining or accelerating,” requiring higher-than-expected interest rate increases, St. Louis Federal Reserve Bank President James Bullard told CNBC. Wednesday.

Bullard hasn’t changed his view of the interest rate higher yet due to the latest data, and he still believes a policy rate in the 5.25% to 5.50% range would be appropriate to keep inflation subdued through this year.

However, investors have responded to the latest data by reinforcing their own sense of where the Fed might end up.

Most don’t see the Fed returning to larger half-percentage point increases, but they do see the central bank moving interest rates higher than previously expected and leaving them at a high level for longer as well – and Fed officials would likely welcome a change in sentiment. Concerned that market prices have undercut their intention to return inflation to the 2% target.

Two-sided debate

The minutes, due for release at 2pm EST (1900GMT), may show just how hawkish the central bank is, especially in what proved to be the last meeting for former Fed vice chair Lyle Brainard. She was among the Fed officials most sensitive to the risks facing the economy under tight monetary policy and the most detailed in charting the reasons why inflation slowed faster than expected.

Brainard, who left the Federal Reserve to chair President Joe Biden’s National Economic Council, focused on the more pessimistic side of the discussion between those advising caution about raising interest rates because the economy may not yet fully adjust to what the Fed has done, and those whose businesses and households are concerned. They are proving so resilient that they may need to be restrained by higher interest rates until inflation abates completely.

While there was little disagreement last year about what the Fed should have done as inflation soared to a 40-year high, the central bank is now in a two-sided debate “to see how resilient the economy has been so far,” analysts at ISI Evercore wrote in a statement. Analysis before the minutes were released, reflects a time lag in monetary policy tightening against a higher short-term neutral rate” needed to slow businesses and households in spending.

While the minutes from the last policy meeting are particularly dated, given the jobs and inflation data released since then, policymakers will update their views with new economic forecasts and interest rate projections released after the end of the Fed’s March 21-22 meeting.

(Reporting by Howard Schneider). Additional reporting by Lindsay Dunsmuir. Editing by Dan Burns and Paul Simao

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