US interest rates may stay high ‘for some time’

WASHINGTON – All members of the US Federal Reserve’s powerful rate-setting committee judged earlier this month that it would be appropriate to keep interest rates high “for some time” in order to tackle inflation, minutes of the meeting released Tuesday show.

On November 1, the Fed announced it was holding interest rates at a 22-year high for a second straight meeting, as it looks to bring inflation firmly down to its long-term target of two percent without damaging the strong economy.

The Fed’s move raised traders’ expectations that it is done hiking interest rates and is moving into a prolonged pause – although Fed chair Jerome Powell has since said the US central bank is prepared to hike interest rates again, if needed.

“All participants judged that it would be appropriate for policy to remain at a restrictive stance for some time until inflation is clearly moving down sustainably,” toward its two percent target, the Fed said.

Despite the Fed’s decision to aggressively tighten monetary policy since March last year, economic growth has remained strong and the labor market was fairly buoyant – although it has shown some recent signs of slowing.

The strong recent economic data has increased the likelihood of a so-called “soft landing,” whereby the Fed succeeds in tackling inflation without plunging the United States into recession.

Economic forecasts prepared by Fed staff for the most recent rate-setting meeting on October 31 and November 1, “expected fourth-quarter GDP growth to slow markedly from its third-quarter rate,” the Fed said.

“All told, however, average GDP growth over the second half of the year was projected to be a little faster than the first half’s pace,” it continued.

The Fed said back in September that it expects the US economy to grow by 2.1 percent this year, and by 1.5 percent in 2024.

Meanwhile, Asian markets drifted yesterday as traders tracked a tepid lead from Wall Street following meeting minutes showing Federal Reserve officials were inclined to keep interest rates elevated for “some time” in order to slay inflation.

Traders took the opportunity to take stock after a recent rally that has been fuelled by a growing optimism that the central bank’s next move will likely be a cut in the new year.

The upbeat mood has lifted equities and seen US Treasury yields retreat from 17-year highs, which has in turn pushed the dollar down against other currencies.

The minutes from the Fed’s October-November policy meeting showed decision-makers recognised the impact that more than a year of rate hikes has had on inflation – which has dropped from the four-decade high seen last year – but were mindful to make sure they got the job done.

“All participants judged that it would be appropriate for policy to remain at a restrictive stance for some time until inflation is clearly moving down sustainably” towards its two percent target, said the minutes published on Tuesday.

The remarks – which echo warnings from several policymakers, including Fed boss Jerome Powell – tempered some of the hope that the bank would slash rates in the new year, with some commentators having pencilled in such a move in March.

However, it did little to fan fears of more hikes on the way, with any increase in Treasury yields seen as doing enough to tighten financial conditions.

“If we were to see stronger economic and inflation data before the December meeting, longer-term rates are likely to rebound and substitute for a rate hike. Therefore we do not expect further hikes,” said Philip Marey at Rabobank.

There is a belief among many traders that the Fed has managed to guide the world’s number one economy to a soft landing by tempering growth without causing a recession.

All three main indexes on Wall Street ended in the red Tuesday, with traders now winding down ahead of the Thanksgiving holiday.