Fed Eyes Move to Restrictive Territory, Higher for Longer Rates: Fed Minutes

By Yasin Ebrahim

Investing.com -- Federal Reserve policymakers agreed on the need to push monetary policy into restrictive territory, and keep rates higher for some time, to dent inflation that remains well above the central bank’s target, the Fed’s September meeting minutes showed Wednesday.

At the conclusion of its previous meeting on Sept. 21, the Federal Open Market Committee raised its benchmark rate by 0.75% to a range of 3% to 3.25%.

It was the third time in a row the central bank had lifted its benchmark rate by three quarters of a percentage point, putting it on course for one of its fastest tightening cycles on record at a time when global growth is on the back foot.

The International Monetary Fund recently cut its global growth forecast to 2.7% for 2023 from a prior forecast in July of 2.9%, warning that 2023 “will feel like a recession for millions around the world.”

Citing an "unacceptably high level of inflation," Fed members were in favor of "purposefully moving to a restrictive policy stance in the near term," with many emphasizing that the "cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action," according to the minutes.

The Fed appears willing to accept that a further slowdown in growth is required as efforts to stifle economic growth by curbing labor demand and wage growth aren’t yet slowing the pace of inflation fast enough. "[I]nflation was declining more slowly than they had previously been anticipating," the Fed minutes said.

"Participants generally anticipated that the U.S. economy would grow at a below-trend pace in this and the coming few years, with the labor market becoming less tight, as monetary policy assumed a restrictive stance and global headwinds persisted," it added.

The Fed’s benchmark rate has increased by 300 basis points in a little over six months, but Fed Chairman Jerome Powell was quick to downplay expectations last month that rates are closing in on restrictive territory.

"We've just moved into the very, very lowest level of what might be restrictive [territory]," Powell said in the FOMC’s September press conference.

At the September meeting, voting Fed members forecast rates to reach 4.4% in 2022, and peak at 4.6% in 2023, leaving some market participants betting on a possible rate cut, or “Fed pivot” in the second half of 2023.

But Fed members have pushed back against those expectations, insisting that once rates reach a "sufficiently restrictive level, it likely would be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the 2 percent objective."

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About 80% of traders expect the Fed to lift rates by 0.75% for the fourth time in a row next month, according to Investing.com’s Fed Rate Monitor Tool.

Inflation data due Thursday could likely all but cement those hawkish Fed rate hike bets as economists forecast a slowdown in headline inflation, but a step up in core inflation, which excludes food and energy prices, and is closely monitored by the Fed as a more indicative measure of underlying price pressures.

The slowdown and uncertainty in the global economy, however, do appear to be on the Fed's radar as "several participants noted that [...] it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook."

The Fed’s quantitative tightening, or bond selling program, is also playing a role in tightening financial conditions after the Fed ramped up the pace of QT to $95 billion last month, up from $47.5 billion in June.

Treasury yields have been quick to price in the Fed’s increasingly hawkish path of monetary policy tightening, with the 10-year Treasury yield trading close to its highs of the year of around 4%.

The rally in yields since the July bottom has put the screws on growth stocks including tech, pressuring the S&P 500 into bear market territory, with some warning of more pain to come.

“There's downside for risk assets because the Fed really isn't under any real pressure to change course,” David Keller at StockCharts told Investing.com's Yasin Ebrahim in an interview on Tuesday.

“If you think the 10-year Treasury yield is high now, it’s because you're looking at too short of a timeframe," Keller added. “Look back at the last 30, 40, or 50 years, you can see we're still at fairly low levels relative to the long-term averages.”