The minutes from the December 13-14, 2022 Federal Open Market Committee (FOMC) meeting showed that the Fed remains committed to bringing inflation back to target.
On the progression of the economy, the Committee members noted that “recent indicators pointed to modest growth of spending and production. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
Committee members anticipated that “ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives.” No participants believed that it would be appropriate to move from a restrictive position in 2023.
Participants recognized the risks of their policy actions by stating that “the lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity”.
Key Implications
Today’s release reaffirms that the Fed isn’t done hiking and that member’s expect rates to remain at elevated levels through this year. Even with the Fed’s past actions, more progress must be made before it can confirm that inflation is on a sustainable downward trajectory. Indeed, while recent inflation prints have signaled a modest deceleration, inflation remains well above the Fed’s 2% target.
With economic activity expected to slow markedly in 2023, recession fears continue to capture headlines. These fears continue to be reflected in the spread between the U.S. 10-year and 2-year Treasury yields, which remains in negative territory. Looking forward, we expect the Fed will continue to raise rates, reaching a peak of 5%, before pausing to monitor the impact on economic activity and inflation over the remainder of 2023.
