Federal Reserve consensus set on keeping rates higher for longer

Minutes from the Fed’s last monetary policy decision meeting released on Tuesday (21 November) showed no indication that rates would either be hiked or cut in the near future, instead arguing it was “critical that the stance of monetary policy be kept sufficiently restrictive”.

“Participants noted that inflation had moderated over the past year but stressed that current inflation remained unacceptably high and well above the committee’s longer-run goal of 2%,” the minutes said.

“They also stressed that further evidence would be required for them to be confident that inflation was clearly on a path to the committee’s 2% objective.”

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At the start of this month, the central bank held interest rates for the second successive meeting, raising hopes that its hiking cycle aimed to stop high inflation had come to an end.

While some had expected the Fed to begin discussing the possibility of cutting interest rates in the meeting, this was completely absent, with the committee members instead emphasising the importance of data-dependence.

“All participants agreed that the committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information,” the minutes added.

All eyes on the data

Since the meeting at the start of this month, data revealed that US inflation came below expectations in October, sitting at just 3.2%.

This solidified the market’s view that there would be no more hikes, instead believing that the Fed would begin cutting interest rates by May, placing 58.6% odds on the proposition, according to data from CME Group.

Following the strong economic performance of the US in Q3, which saw annualised GDP surge by 4.9%, the minutes revealed an expectation that economic growth would “slow markedly”, though average GDP growth in the second half of the year is still expected to be higher than the first half.

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“With the lagged effects of monetary policy actions expected to restrain activity, real GDP was projected to rise more slowly than the staff’s estimate of potential over the next two years before rising in line with potential in 2026,” it said.

Meanwhile, the US has seen a surge in Treasury yields, with 10-year yields reaching 5% for the first time in 16 years last month.

While this has lessened somewhat, falling to 4.4% currently, Fed officials concluded that this rise had been fuelled by rising term premiums, viewing these as a product of greater supply as the government finances its increasingly large budget deficits.

“Participants highlighted that longer-term yields could be volatile and that the factors behind the recent increase, as well as their persistence, were uncertain,” the minutes said.

“However, they also noted that, whatever the source of the rise in longer-term yields, persistent changes in financial conditions could have implications for the path of monetary policy and that it would therefore be important to continue to monitor market developments closely,” they added.