US inflation falls but Fed sticks to its guns on rates
The US Federal Reserve has made “clear progress” in bringing down inflation towards its 2 per cent goal, but officials were less certain on when it may start cutting interest rates, minutes released from the December 12-13 meeting showed.
After leaving interest rates unchanged at 5.4 per cent – a 22-year high – in December, officials believe that rates are “likely now at or near its peak for this policy tightening cycle” while also leaving the door open for another increase if warranted, the minutes read.
But when the Fed may begin cutting interest rates is less clear.
The Fed has signalled several rate cuts for this year, but participants in the meeting “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably towards the committee’s objective”.
“Many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for the committee to reach its inflation goal,” the minutes read.
They also showed that officials saw signs that rates were having the intended effect of slowing demand and cooling the labour market.
“In their discussion of inflation, all participants observed that clear progress had been made in 2023 towards the committee’s 2 per cent inflation objective,” the minutes read.
Inflation has significantly fallen since the Fed began its tightening cycle.
Recent government data showed that the Fed’s preferred metric, the Personal Consumption Expenditures price index, rose by 2.6 per annually in November. But on a monthly basis, the index decreased by 0.1 per cent.
Meanwhile, Tom Barkin, the president of the Federal Reserve Bank of Richmond, said he believed the odds of taming inflation without tipping the economy into a recession were improving, but warned that risks still remained. “A soft landing is increasingly conceivable but in no way inevitable,” he said.
Mr Barkin said “you could see the case” for the potential of a soft landing, which he defined as returning to normal while the “economy stays healthy”. Among the signs pointing to this scenario is inflation “coming into range of our 2 per cent target”.
He also warned that the Fed’s Goldilocks scenario was far from a sure thing.
A majority of Fed officials projected three rate cuts this year, with interest rates falling somewhere between 4.25 per cent and 5 per cent.
Mr Barkin, who did not vote on monetary policy decisions in 2023, is a voting member on the board this year.