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The Fed Would Rather Do Too Much Than Too Little In Inflation Fight

David Krechevsky
Oct 12, 2022
The Federal Reserve Board of Governors is becoming one person smaller: Daniel K. Tarullo submitted his resignation this afternoon, effective on or around April 5

September meeting minutes show renewed resolve to continue tightening monetary policy.

KEY TAKEAWAYS
  • At its September meeting, The Fed raised its benchmark rate by 0.75% for the third straight month.
  • Committee also raised target range for the rate to between 3% and 3.25%.

If you thought the Federal Reserve would ease off of its efforts to tighten monetary policy as it battles inflation, think again.

According to the minutes of the Federal Reserve’s Federal Open Market Committee (FOMC) meeting held Sept. 20-21, members would rather err on the side of doing too much than not enough.

With inflation remaining at an “unacceptably high level,” according to the minutes, “Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”

It was during this meeting that the FOMC unanimously agreed to raise the benchmark federal funds rate by 75 basis points for the third consecutive month.

The committee also decided to raise the target range for the rate to between 3% and 3.25%, adding that it anticipates “that ongoing increases in the target range would be appropriate.”

Just how long the Fed will continue to tighten monetary policy remains an open question. 

"Several participants underlined the need to maintain a restrictive stance for as long as necessary,” the minutes state, “with a couple of these participants stressing that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation.”

The minutes note that “recent monthly readings indicated that consumer price inflation — as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE) — remained elevated.” 

Total PCE price inflation was 6.3% over the 12 months ending in July, while core PCE price inflation — which excludes changes in consumer energy and food prices — was 4.6% over the same period. 

In addition, in August, the consumer price index (CPI) was up 8.3% over the past 12 months, while core CPI inflation — which excludes volatile energy and food prices — was 6.3% over the same period.

Those figures remain well above the Fed’s target rate for inflation of 2%.

Committee members also noted that, in part as a reaction to the Fed’s rate hikes, borrowing costs for residential mortgage loans increased, reaching their highest levels since 2008.

“Credit in the residential mortgage market remained available for high-credit-score borrowers,” the minutes state. “Credit availability for low-credit-score borrowers continued to ease through July, but remained modestly tight — close to pre-pandemic averages. However, the volumes of both home-purchase and refinance mortgage originations plunged in July amid rising mortgage rates.”

Still, FOMC members said the 75-basis-point rate hike approved at the September meeting “was another step toward making the committee’s monetary policy stance sufficiently restrictive to help ease supply-and-demand imbalances and to bring inflation back to 2%.”

They also reaffirmed their “strong commitment” to bringing inflation down to 2%, “with many stressing the importance of staying on this course, even as the labor market slowed.”

As for future meetings — the FOMC is scheduled to meet twice more this year, on Nov. 1-2 and Dec. 14-15 — committee members stated they continue to expect that” ongoing increases in the target range for the federal funds rate would be appropriate” to achieve the 2% objective. 

“Participants judged that the committee needed to move to, and then maintain, a more restrictive policy stance in order to meet the committee’s legislative mandate to promote maximum employment and price stability,” the minutes state.

Several members of the FOMC did note, however, that, given the uncertainty in the U.S. and global economies, “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.”

Included among the risks is a “softening” in the labor market, which members said would be needed in order to ease the upward pressure on wages and prices, but also could lead to an increased unemployment rate. 

At the time of the meeting, the unemployment rate had risen to 3.7% in August. It fell back to 3.5% in September. During the September meeting, some FOMC members raised concerns that unemployment could rise higher than the Fed forecasts — it projects the rate to rise to 4.4% in 2023 — as it continues to tighten monetary policy.

“Participants observed that, as the stance of monetary policy tightened further, it would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” the minutes state. “Many participants indicated that, once the policy rate had reached 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% objective.”

Committee members added that “the pace and extent of policy rate increases would continue to depend on the implications of incoming information for the outlook for economic activity and inflation and on risks to the outlook.”

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