Fed to keep rates high as U.S. faces high inflation

The Federal Reserve’s meeting minutes released on Wednesday indicated that the central bank would keep interest rates to remain elevated for some time.

The Fed also decided to raise the key interest rate by a half-point, noting that inflation is still too high, which is therefore why it must maintain its restrictive policy stance. Its decision to raise the key rate marked the highest level for the benchmark rate in 15 years at 4.25-4.5 percent.

The central bank also noted that it would continue to monitor the inflation data to determine the appropriate level of interest rates. Officials, meanwhile, emphasized that the public should not read too much into the Fed's decision to reduce the pace of rate increases.

Several participants emphasized the importance of communicating the Fed's intention to continue raising rates. They said that a slower pace of increase was not a sign that the central bank's efforts to achieve its price stability objective had weakened.

"A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path," the Fed's minutes said.

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After the meeting, Jerome Powell, the chairman of the Fed, noted that the progress that the central bank has made in its fight against inflation had only been halting. He expected the interest rate to remain at a high level for some time.

Despite market pricing, the minutes indicated that the committee members did not expect the interest rate to be lowered in 2023. The likelihood of a rate increase at the central bank's next meeting is currently at around 0.5-0.75 percent.

Traders expect the Fed to raise rates by a quarter-point at its next meeting, which will take place on February 1.

The current pricing indicates that the interest rate could be reduced by a quarter-point at the end of the year, which would lead the funds' rate to a range between 4.5-4.75 percent.

However, Fed officials have repeatedly stated that they do not expect to change their policy in 2023.

Fed hopes to bring inflation rate down

Officials are facing various policy risks. One of these is the possibility that the Fed might be unable to keep raising rates long enough to prevent inflation from rising.

The other is the risk that the central bank might slow the economy too much, which could put the most vulnerable members of society at risk.

Members noted that the upside risks to the outlook for inflation were still significant factors that could influence the Fed's policy outlook. They suggested that it was appropriate to maintain a restrictive stance for a significant amount of time until inflation returned to its 2 percent objective.

The Fed has been gradually reducing its balance sheet in response to the rising interest rates. Through a program that started in June, the central bank has been able to reduce its balance sheet by around $364 billion.

Despite the various positive signs presented by the recent inflation readings, the labor market is still expected to remain resilient. According to data released earlier this week, the number of job openings remained nearly twice as high as the number of available workers.

The labor market is critical to the Fed's strategy to prevent inflation. The growth in nonfarm payrolls has exceeded expectations. Job openings have also remained high.

In November, the consumer price index, the Fed's preferred measure of inflation, was at 4.7 percent, below its high of 5.4 percent in February 2022. However, it still remains above the central bank's 2 percent target.