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Fed minutes expected to anchor ‘prudent’ monetary policy approach


WASHINGTON, Nov 21 (Reuters) – Federal Reserve Chairman Jerome Powell used the word “cautious” liberally at his latest news conference as he described the U.S. central bank’s efforts to balance the risks of a still high inflation and a surprise surge in the economic situation. growth in the face of tightening credit conditions and the Fed’s belief that the economy was on the verge of slowing.

Minutes from this Oct. 31-Nov. period The first meeting, due Tuesday at 2 p.m. EST (7 p.m. GMT), is also expected to focus on a word that U.S. monetary policy makers have rallied around at a time when it seems unlikely that they will raise the target interest rate further. I don’t want to say this as long as inflation remains well above the central bank’s 2% target.

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“Inflation has given us some false pretenses. If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Powell said at an International Monetary Fund research conference early in month. “We will, however, continue to act cautiously, allowing us to address both the risk of being misled by a few good months of data and the risk of over-tightening.”

But there is also a growing sense that the Fed could be on the verge of doing the unexpected by emerging from the worst inflationary surge in 40 years without causing major damage to the economy.

A New York Fed study released Tuesday, the result of a broad general model of the economy, actually suggests that the US central bank’s late start in raising interest rates, with the first increase coming a year after the start of a sharp rise in prices, allowed the economy to accumulate more growth with the same progress in reducing inflation as would have been the case if the rate hikes had started earlier.

The late start forced the Fed to raise rates faster and higher than would otherwise have been necessary, but the net impact “was positive…because of the initial momentum associated with holding the funds rate steady.” federal funds near zero in 2021… Inflation “interest rates do not differ significantly” from what would have been achieved by starting to raise rates earlier.

Policymakers, however, are reluctant to declare victory at this stage or give investors direct guidance on what will happen next.

As a result, the minutes will likely include the “superficially hawkish rhetoric” that rates could rise further, Citi analysts wrote in a preview of the release on Sunday. But “we continue to think that Fed officials are likely done raising rates this cycle.”

Most investors do the same, with contracts tied to the benchmark overnight federal funds rate showing a near-zero chance that the Fed will exceed the current range of 5.25% to 5.50%. The CME Group’s FedWatch tool estimates the chances of a rate cut at around 57% for the Fed’s policy meeting from April 30 to May 1, 2024.

The minutes, like those of current Fed policymakers, will not allow discussion of this issue, with officials insisting that they are still unsure whether the policy rate is “restrictive enough” to put an end to the fight against inflation. Their public remarks, however, have begun to focus more on how long rates might need to stay at the current level and less on how much they might need to rise.

“Inflation does appear to be stabilizing,” Richmond Fed President Thomas Barkin told Fox Business on Monday. But he also felt he was likely to remain “stubborn, and that justifies me in staying longer.”

FOCUSED ON INFLATION

The Fed has kept rates unchanged since July, about four months. In the last two rounds of policy tightening, the Fed lowered its benchmark overnight interest rate in July 2019, seven months after reaching what proved to be a peak, and in September 2007, 15 months after what turned out to be the highest rate this cycle.

However, the Fed was not facing an inflation surge at that time, and policymakers said their decision on how long the current rate would remain unchanged would depend on the behavior of inflation, the continued progress towards the 2% objective being a necessary condition for any increase. change.

“What I would look for is lasting evidence” of steadily falling inflation, Boston Fed President Susan Collins said last week. “The data is really noisy right now.”

But if the watchword at the last meeting was “caution” — Powell used it eight times during his Nov. 1 news conference — support for that approach has likely intensified since then.

October data showed consumer prices were flat month-over-month, retail sales fell slightly and businesses added just 150,000 jobs, a figure more in line with performance of the economy before the coronavirus pandemic.

“Being very patient right now…it’s an appropriate balance,” Collins said last week.

Reporting by Howard Schneider; Editing by Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

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Covers the U.S. Federal Reserve, monetary policy and economics, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, business reporter and local staffer at the Washington Post.

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