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Fed meeting minutes could point to end of rate hike game, new debate phase

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WASHINGTON, Jan 4 (Reuters) – The Federal Reserve ended 2022 with a firm promise at its December policy meeting that interest rates would continue to rise this year, but at a slower pace and perhaps just another three-quarters of a point. percentage.

Reading from that session, due out at 2pm EST (1900 GMT) on Wednesday, could provide more insight into how the end game of the current tightening cycle will play out and how deeply Fed officials are beginning to weigh the risks. for economic growth. against his main concern about inflation.

The general tone of the minutes should still show that inflation is top of mind among policy makers. It has been slowing for several months, but in November the Fed’s preferred inflation gauge – the consumer spending price index – was still rising at an annual rate of 5.5%, more than double the 2% target. of the US central bank.

The minutes “will lean against premature easing” and keep the focus on the likelihood that rates will rise further and remain high, Derek Tang, an economist at LH Meyer, wrote on Tuesday.

But the details of the document, with its descriptions of different viewpoints and the approximate sizes of the groups of policymakers offering them, may show that the Fed’s internal deliberations are entering a new phase where risks to economic growth and the employment gain more weight.

Fed officials’ projections released on Dec. 14 showed near-unanimity on where interest rates will go in 2023, with 15 of 19 policymakers expecting the target rate to rise by three-quarters of a percentage point or a full percentage point over the next few months. months. , a narrow range that would see the current cycle end this spring with that rate around 5.25% or 5.5%.

But in 2024 projections diverge dramatically, with one official seeing the prime rate remain at 5.625%, another seeing it reduced to 3.125% and no more than seven officials agreeing to any specific rate in an economy that may still be flirting. or going through a recession.

“The FOMC seems united in getting the policy above 5%, but is quite divided on the exit strategy; how long to hold and how deeply and quickly to ease on the other side,” Tang wrote, referring to the Federal Open Market definition. of central bank policy. Committee.

KNOWN OF RISKS

The minutes can help define how much sentiment there is to slow the pace of the next quarter-point rate hikes from Jan. 31 to Feb. 1 meeting. The Fed used three-quarter percentage point increases for much of 2022, but cut back to a half percentage point increase in December and indicated it may ease the pace further as it looks for a suitable stopping point. .

New economic data between now and then will shape that decision. Closely-watched statistics on US job openings will be released ahead of Wednesday’s minutes, followed on Friday by the December monthly jobs report – both key benchmarks for Fed officials who expect the US job market to US adjusts to slower growth and higher interest rates with limited job losses.

Consumer inflation data for December will be released next week.

While Fed Chair Jerome Powell remained adamant in December that the central bank will do whatever it takes to rein in inflation, he also said policymakers are aware of the risks of overreacting — something Fed staff has also begun. to emphasize.

In the minutes of the Nov. 1-2 meeting, Fed staff put roughly equal odds of a recession in 2023, and new research late last month warned that with the world’s major central banks raising rates simultaneously, the combined impact may be greater than anticipated, as politics in one country influence bond yields, currency values ​​and trading patterns in another.

“It is especially challenging to estimate spillovers, and there are concerns that policymakers may underestimate them. If so, there is a risk of excessive tightening that central banks need to be, and we believe are, aware of,” Fed economist Dario Caldara , Francesco Ferrante and Albert Queralto wrote.

Howard Schneider; Reporting by Howard Schneider; Edited by Dan Burns and Paul Simão

Our Standards: Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the Washington Post local staff.

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