Fed Wants ‘Substantially’ Lower Inflation Before Easing Interest Rates—And Some Officials Backed More Aggressive Hikes - Forbes

Topline

With inflation continuing to run hotter than expected, the Federal Reserve is showing no signs of backing down on its aggressive monetary policy, according to notes from the Fed's policy-setting committee released Wednesday, an unwelcome sign for investors clinging to hopes of a less hawkish central bank.

Key Facts

Some Fed officials supported a steeper half-point rate increase to the federal funds rate earlier this month, according to minutes from the Federal Open Market Committee’s January 31-February 1 meeting, in which the panel agreed to a quarter-point rate increase to the federal funds rate.

The Fed wants to see, “substantially more evidence of progress across a broader range of prices…to be confident that inflation was on a sustained downward path” and let its foot off the gas on interest rates, the minutes read.

The labor market remains "very tight," according to the Fed, which argues elevated wages drive up consumer prices as companies react to higher input costs.

Ever sensitive to any information from the Fed on interest rates, stocks slipped following the release of the minutes, with the Dow Jones Industrial Average dropping 0.3%, or 110 points.

Stocks rose earlier Wednesday after James Bullard, president of the Fed’s St. Louis branch, told CNBC he expected the federal funds rate to peak at 5.4%, in line with consensus forecasts, notable considering Bullard is among the Fed officials more keen to aggressive rate increases.

“Bullard is one of the more hawkish [Fed officials], so if he thinks we only have a little ways to go here, the peak in rates might be properly priced” into stock prices, Oanda analyst Ed Moya explained in a Wednesday note.

Key Background

The 25-basis-point hike earlier this month followed a half-point increase in December, itself preceded by four consecutive 75-basis-point hikes, each the largest individual jumps in nearly three decades. The slowdown came as data showed inflation was in fact easing, though prices cooled slower than expected last month. The latest inflation reading caused Bank of America and Goldman Sachs to up their projections for the Fed to raise rates by 25 basis points at its next three meetings to a peak of 5.25% to 5.5%, with Bullard’s forecast in the middle of that range.

Crucial Quote

“We have a good shot at beating inflation in 2023,” Bullard told CNBC Wednesday. The widely cited “core” portion of the consumer price index was 5.5% last month, down from its 40-year peak of 6.6% in September but still far higher than the 2% annualized increase targeted by the Fed.

Surprising Fact

The Dow suffered its worst daily decline of 2023 on Tuesday, shedding nearly 700 points, as investors reacted to two more major earnings reports marred by lukewarm outlooks as companies deal with elevated borrowing costs that impact bottom lines.