Fed Minutes Show Embrace of Inflation Progress but No Hurry to Cut Rates

Federal Reserve officials welcomed a recent inflation slowdown at their last meeting in late January but were intent on proceeding carefully as they tiptoe toward rate cuts, according to minutes from that gathering, which were released on Wednesday.

Central bankers raised interest rates sharply from March 2022 to July 2023, pushing them to 5.3 percent from a starting point near zero. Those moves were meant to cool consumer and business demand, which officials hoped would weigh down rapid inflation.

Now, inflation is slowing meaningfully. Consumer prices climbed 3.1 percent in the year through January, down sharply from their recent peak of 9.1 percent. But that is still faster than the pace that was normal before the pandemic, and it is above the central bank’s goal: The Fed aims for 2 percent inflation over time using a different but related metric, the Personal Consumption Expenditures index.

The economy has continued to grow at a solid clip even as price growth has moderated. Hiring has remained stronger than expected, wage growth is chugging along and retail sales data have suggested that consumers are still willing to spend.

That combination leaves Fed officials contemplating when — and how much — to lower interest rates. While central bankers have been clear that they do not think they need to raise borrowing costs further at a time when inflation is moderating, they have also suggested that they are in no hurry to cut rates.

“There had been significant progress recently on inflation returning to the committee’s longer-run goal,” Fed officials reiterated in their freshly released minutes. Officials thought that cooler rent prices, improving labor supply and productivity gains could all help inflation to moderate further this year. Policymakers also suggested that “upside risks to inflation” had “diminished” — suggesting that they are becoming more confident that inflation is coming down sustainably.

But they also identified risks that could pull inflation higher. In particular, “participants noted that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year.”

When policymakers last released economic projections in December, their forecasts suggested that they could make three quarter-point rate cuts this year, to about 4.6 percent. Investors are now betting that rates will finish 2024 at around 4.4 percent, though there is some feeling that they could end up slightly higher or lower.

As they think about the future of policy, Fed policymakers must balance competing risks.

Leaving interest rates too high for too long would risk slowing growth more than officials want — a concern that “a couple” of officials raised at the Fed’s late January meeting. Overly tight policy could push unemployment higher and could even spur a recession.

On the other hand, cutting rates prematurely could suggest to markets and everyday Americans that the Fed is not serious about crushing inflation until it is fully back to normal. If price increases were to pick up again, they could be even harder to crush down the road.

“Most participants noted the risks of moving too quickly to ease the stance of policy,” the minutes said.

Policymakers are also contemplating when to stop shrinking their balance sheet of bond holdings so rapidly.

Officials bought lots of Treasury and mortgage-backed debt during the pandemic, first to soothe troubled markets and later to stimulate the economy by making even longer-term borrowing cheaper. That swelled the size of the Fed balance sheet. To reduce those holdings to a more normal level, officials have been allowing securities to mature without reinvesting the proceeds.

But central bankers want to move carefully: If they adjust the balance sheet too quickly or too much, they risk upsetting the plumbing of financial markets. In fact, that happened in 2019 after a similar process.

Policymakers decided at their meeting that “it would be appropriate” to begin in-depth discussions of the balance sheet at the Fed’s next meeting, which will take place in March — with some suggesting that it might be useful to slow the pace of the shrinking and that doing so “could allow the committee to continue balance sheet runoff for longer.”