At their December meeting, Federal Open Market Committee members agreed that further increases in the federal funds rate would be necessary to slow inflation, and they worried that their decision to reduce the level of the most recent rate increase could be interpreted by markets as a softening of that position, making it harder to achieve price stability, according to committee minutes released today.
The FOMC voted in December to raise the rate by 50 basis points. The committee had raised the rate by 75 basis points in each of its previous four meetings, and the December minutes show participants believed a restrictive policy stance would continue to be necessary, with no one forecasting the rate lowering in 2023. “Participants concurred that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path,” according to the minutes.
Still, committee members believed a lower rate increase was appropriate to give time for members to assess the economic effects of a tighter policy stance. At the same time, several participants stressed the need to communicate that the decision “was not an indication of any weakening of the committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”
“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability,” according to the minutes. The FOMC will next meet Jan. 31-Feb. 1.
