Fed Minutes set to show broad support for higher peak rate

(Bloomberg) — The Federal Reserve will reveal how united policymakers met this month on a higher rate spike than previously projected as they calibrate their fight against decades of high inflation.

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At the conclusion of the November 1-2 meeting of the Federal Reserve’s policy-making Federal Open Market Committee, Chairman Jerome Powell told reporters that interest rates should likely move higher than the FOMC’s quarterly forecasts had indicated in September.

The Fed will publish the minutes of its meeting in Washington on Wednesday at 2 p.m.

In his post-meeting press conference, Powell linked the idea of ​​a higher peak for the Fed’s benchmark rate to a disappointing inflation report released in the weeks after the September forecasts were released. The question of how the FOMC views the relationship between near-term inflation data and the ultimate destination for rates is a critical one for investors. Officials will update the projections at their next meeting on December 13-14.

“If the topic of higher-than-expected interest rates comes up in September, I would see how many people support that,” said Karim Basta, chief economist at III Capital Management, based in Boca Raton, Florida.

“I think there will be unity around ‘tariffs have to be higher’,” Basta said. “But I don’t think there will be any unanimity that rates should go higher than expected at the September meeting, as Powell said at the press conference.”

What Bloomberg Economics Says…

“The members of the FOMC committee have been remarkably united in setting monetary policy so far this year. The minutes of the November meeting are likely to reveal a consensus among policymakers that the Fed should slow rate hikes, but less agreement on the end point.”

— Anna Wang (Chief US Economist)

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The Fed has waged an aggressive campaign of monetary tightening this year, including increases of three-quarters of a percentage point — three times its usual size — at each of its last four policy meetings.

With the benchmark rate just below 4%, Powell suggested in his post-November meeting press conference that the central bank was likely to step down to smaller rate hikes as early as December.

More important for the financial markets and the economy is when Fed officials will be satisfied enough with inflation progress to halt rate hikes altogether.

A November 10 Labor Department report on consumer prices suggested that the long-anticipated decline in inflationary pressures may finally begin. But the good news from the latest data may not be enough to negate the bad news from the previous month, which was the background to Powell’s comment about higher interest rates.

According to Marc Giannoni, chief US economist at Barclays Plc in New York, continued strength in the labor market is another factor the Fed is considering as a likely reason for raising its rate forecasts.

He pointed to monthly job vacancy data published before the November meeting, which had suggested a fall in labor demand, versus data released after the meeting, which indicated job vacancies were rising again.

“We’ve seen pretty robust measurements so far,” Giannoni said. “That shows that there is still a lot of dynamism on the labor market.”

Investors now expect the Fed to opt for a half-point rate hike at its December meeting, bringing the target range for the benchmark to 4.25% to 4.5%, peaking at around 5% next year, according to prices of futures market contracts. That compares to a spike of 4.5% to 4.75% in the Fed’s September forecasts.

Two policymakers — Cleveland Fed President Loretta Mester and her San Francisco counterpart Mary Daly — reinforced those expectations in public comments Monday.

“I don’t think the market outlook is really wrong,” Mester said during an interview on CNBC. Daly told reporters after an event in Irvine, California that “5% to me is a good starting point” for how high rates need to go to restore price stability.

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