Fed Minutes Set to Show Breadth of Support for Higher Peak Rate

(Bloomberg) — The Federal Reserve is set to show how united policymakers were at their meeting this month over a higher peak for interest rates than previously signaled as they calibrate their fight against decades-high inflation.

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At the conclusion of the Nov. 1-2 meeting of the US central bank’s policy-setting Federal Open Market Committee, Chair Jerome Powell told reporters that rates would probably have to go higher than the FOMC’s quarterly projections in September had indicated.

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

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

“If the topic of rates going higher than projected in September comes up, I’d be looking for how many support that,” said Karim Basta, the chief economist at III Capital Management, which is based in Boca Raton, Florida.

“I think there will be unity around ‘rates need to go higher,’” Basta said. “But I don’t think there will be unanimity that rates need to go higher than projected at the September meeting, which is what Powell said at the press conference.”

What Bloomberg Economics Says…

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

— Anna Wang (chief US economist)

— To read more click here

The Fed has undertaken an aggressive campaign of monetary tightening this year, which has included increases of three-quarters of a percentage point — triple the usual size — at each of its last four policy meetings.

With the benchmark rate now just below 4%, Powell suggested in his press conference after the November gathering that the central bank would probably step down to smaller rate hikes as soon as December.

More important for financial markets and the economy is when Fed officials will feel sufficiently satisfied with progress on the inflation front to cease rate hikes altogether.

A Nov. 10 Labor Department report on consumer prices suggested that the long-awaited downdraft in inflationary pressures may finally be underway. But the good news from the latest data may not be enough to cancel out the bad news from the month before that formed the backdrop to Powell’s remark about a higher terminal rate.

Ongoing strength in the labor market is another factor that the Fed is taking into account as a likely reason to mark up its projections for rates, according to Marc Giannoni, chief US economist at Barclays Plc in New York.

He pointed to monthly data on job openings published before the November meeting, which had suggested a drop in labor demand, versus data published after the meeting that indicated job openings were rising again.

“So far, we’ve seen fairly robust readings,” Giannoni said. “That shows still a lot of momentum in the labor market.”

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

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 expectation is really off,” 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.