The US Federal Reserve has made “clear progress” in bringing down inflation towards its 2 per cent goal, but officials were less certain on when it may start cutting interest rates, minutes released from the December 12-13 meeting on Wednesday showed.
And after leaving interest rates unchanged at 5.4 per cent – a 22-year high – in December, officials now believe that rates are “likely now at or near its peak for this policy tightening cycle” while also leaving the door open for another increase if warranted, the minutes read.
But when the Fed may begin cutting interest rates is less clear.
The Fed has signalled several rate cuts for this year, but participants in the meeting “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably towards the committee's objective”.
“Many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for the committee to reach its inflation goal,” the minutes read.
Wednesday's minutes also showed that officials saw signs that interest rates were having the intended effect of slowing demand and cooling the labour market.
“In their discussion of inflation, all participants observed that clear progress had been made in 2023 towards the committee's 2 per cent inflation objective,” the minutes read.
Soft landing possible but not inevitable, Fed official says
Inflation has significantly fallen since the Fed began its tightening cycle. Recent government data showed that the Fed's preferred metric grew 2.6 per cent year on year in November. On a monthly basis, the Personal Consumption Expenditures (PCE) Price Index decreased by 0.1 per cent.
Earlier on Wednesday, a Fed official said he believes the odds of taming inflation without tipping the economy into a recession are improving, but warned that risks still remain.
“A soft landing is increasingly conceivable but in no way inevitable,” Tom Barkin, President of the Federal Reserve Bank of Richmond, said earlier on Wednesday.
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Mr Barkin said “you could see the case” for the potential of a soft landing, which he defined as returning to normal while the “economy stays healthy”. Among the signs pointing to this scenario is inflation, which he said is “coming into range of our 2 per cent target”.
He also warned that the Fed's Goldilocks scenario is far from a sure thing, pointing to geopolitical risks as well as the potential of the Fed's interest rates hitting consumers harder than anticipated.
A majority of Fed officials projected three rate cuts this year with interest rates falling somewhere between 4.25 per cent and 5 per cent.
But Mr Barkin suggested that the path of the Fed's rates should not be the focus of peoples' attention.
“I would caution you to focus less on the rate path and more on the flight path – is inflation continuing its descent and is the broader economy continuing to fly smoothly? Conviction on both questions will determine the pace and timing of any changes in rates,” he said.
Mr Barkin, who did not vote on monetary policy decisions in 2023, is a voting member on the board this year.
