Fed minutes for detailed debate on rate hike endgame

WASHINGTON, Feb. 22 (Reuters) – The minutes of the Federal Reserve’s latest policy meeting are expected to detail on Wednesday the extent of the debate at the US central bank over how much further interest rates may be needed to curb inflation and cooling an economy that has remained stronger than expected despite monetary tightening.

The January 31 to February. 1 meeting ended with the Fed raising its key interest rate by a quarter of a percentage point, a return to a more standard rate hike after a year of consecutive hikes of 75 basis points and half a percentage point.

In a news conference following the end of that meeting, Fed Chairman Jerome Powell said the return to smaller rate hikes would allow for a more step-by-step search for a potential stopping point, and that officials “talked a lot about the way forward” during the session. as the central bank approaches what could be the end of its walking cycle.

But that session also came before the release of key data showing unusually strong job growth in January, and less than expected slowdown in inflation – a trend expected to continue this week with the release on Friday of a report on how the Fed index’s preferred inflation rate did in January.

The central bank uses the Personal Consumption Expenditure price index when setting its inflation target of 2%. Economists polled by Reuters estimate that the PCE, excluding more volatile food and energy components, rose 4.3% year on year last month, a slight improvement from December’s 4.4% jump. But on a monthly basis, that core inflation is actually expected to have increased from 0.3% in the previous period to 0.4%.

“The news just broke that the US economy is stronger than we previously thought… Our risk right now is that inflation will not fall or accelerate again,” and will require higher-than-expected rate hikes, St. Louis Fed President James Bullard said. Wednesday on CNBC.

Bullard has not yet revised its own interest rate outlook upwards on the basis of recent data, and still thinks that a policy rate in the range of 5.25% to 5.50% will be enough to keep inflation low this year.

However, investors have reacted to recent data by bolstering their own sense of where the Fed could end up.

Most don’t see the Fed returning to larger half-percentage point hikes, but they do see the central bank raise rates higher than previously expected and also leave them at high levels for longer – a change in sentiment likely to be welcomed by Fed officials worried that market prices had underestimated their determination to bring inflation back to the 2% target.

TWO-SIDED DEBATE

The minutes, expected to be released at 2 p.m. EST (1900 GMT), may show just how much the central bank is still inclined to aggressive policy, particularly in a meeting that turned out to be the last for former Fed Vice Chairman Lael Brainard . She was one of the Fed officials most sensitive to the risks the economy faces from tight monetary policy and the most detailed in outlining reasons why inflation could slow faster than expected.

Brainard, who left the Fed to head President Joe Biden’s National Economic Council, anchored the more lenient side of a discussion among those who advised caution on further rate hikes because the economy may not yet have fully adjusted to what the Fed has been doing , and those who feel that businesses and households are proving so resilient that they may need even higher interest rates to fully curb inflation.

While there was little disagreement last year about what the Fed should do as inflation soared to a 40-year high, the central bank is now engaging in a more two-sided debate “to find out how much the economy’s resilience reflects so far.” delays in monetary tightening versus higher near-term neutral interest rates “necessary to induce companies and households to slow down their spending, ISI Evercore analysts wrote in an analysis ahead of the minutes’ release.

While the minutes of the last policy meeting are deeply dated, given the jobs and inflation data released since then, policymakers will update their views with new economic and interest rate forecasts released after the end of the Fed’s March 21-22 meeting .

Reporting by Howard Schneider; Additional reporting by Lindsay Dunsmuir; Edited by Dan Burns and Paul Simao

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