Federal Reserve officials remain hesitant to reduce interest rates soon, given persistent inflation surpassing their target, minutes of the October 31-November 1 meeting revealed.
Contrary to the market's expectation, the minutes did not suggest any discussion about the starting point of the rate cuts. This sentiment was echoed in Chairman Jerome Powell's post-meeting speech.
Federal Open Market Committee (FOMC) members said further actions to curb inflation are necessary. They decided that the policy would remain "restrictive" until clear evidence demonstrates a sustained return of inflation to the central bank's two percent target.
The U.S. economy grew at an annualized rate of 4.9 percent in Q3, but consumer prices showed no increase in October — a sign inflation is cooling down.
While the Fed has yet to conclude its fight against rapid price hikes, central bankers know that the rising interest rate risks dampening economic growth and job creation. Discussions have now shifted towards determining the duration of maintaining the policy rate within the current 5.25-5.50 percent range.
"Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee's inflation objective was insufficient," said the minutes, indicating that it would take an "unexpected shock" to prompt a further rate increase.
This differed from the previous minutes for the September meeting, in which "a majority of participants" said another rate hike was necessary.
Fed officials anticipate a significant slowdown in economic growth in the fourth quarter. However, they caution that risks to broader economic growth are likely tilted toward the downside while inflationary pressures remain persistent.
Further details will be provided during FOMC's last meeting this year, on December 12-13, with policymakers releasing new projections for interest rates and the economy.
The document did little to faze markets. Contracts tied to the federal funds rate indicate a near-zero probability of further rate hikes. Markets are now pricing in an approximate 60 percent rate cut by May next year.
Market's response
Concerns about rising Treasury yields dominated the Fed's meeting. As the Fed released its minutes, the Treasury Department announced its borrowing requirements for the coming months, which were slightly lower than market expectations.
Treasury yields retreated from their 16-year highs following the meeting as markets assessed the implications of the government's substantial borrowing activities and the Fed's anticipated monetary policy trajectory.
However, it slipped again on Tuesday night as the minutes were released, with the benchmark 10-year note last standing at 4.4178 percent.
The Fed attributed the rise in Treasury yields to an increase in "term premiums," the additional compensation investors demand for holding longer-term bonds. The rising term premium resulted from increased government borrowing to cover its substantial budget deficits.
The dollar index, gauging the greenback's strength against a basket of currencies, edged up 0.06 percent to 103.63 after closing at 103.57. It is inching away from the over two-month low of 103.17 on Tuesday. The index is down about three percent so far in November and poised for its worst monthly performance in a year.
The euro last stood at $1.0899 after rising to $ 1.09655 on Tuesday, its highest against the dollar since mid-August. Sterling was mostly flat at $1.2520, not far from a two-month high of $1.2558 touched overnight.