Federal Reserve officials at their last meeting saw “very few signs that inflation pressures were abating” before raising their benchmark interest rate by a substantial three-quarters of a point for a fourth straight time.
Rising wages, the result of a strong job market, combined with weak productivity growth, were “inconsistent” with the Fed’s ability to meet its 2 per cent target for annual inflation, the policy-makers concluded, according to the minutes of their Nov. 1-2 meeting released Wednesday.
But they also agreed that smaller rate hikes “would likely soon be appropriate. The Fed is widely expected to slow its rate hikes to a half-point increase when it next meets in mid-December.
At their meeting early this month, the Fed officials also expressed uncertainty about how long it might take for their rate hikes to slow the economy enough to tame inflation. Chair Jerome Powell stressed at a news conference after this month’s meeting that that the Fed isn’t even close to declaring victory in its fight to curb high inflation.
Still, some of the policy-makers expressed hope that falling commodity prices and the unsnarling of supply chain bottlenecks “should contribute to lower inflation in the medium term.” Earlier this month, the government reported that price increases moderated in October in a sign that the inflation pressures might be starting to ease. Consumer inflation reached 7.7 per cent in October from a year earlier and 0.4 per cent from September. The year-over-year increase was the smallest rise since January.
Wednesday’s minutes revealed that Fed officials expected ongoing rate increases to be “essential” to keep Americans from expecting inflation to continue indefinitely. When people expect further high inflation, they act in ways that can make those expectations self-fulfilling – by, for example, demanding higher wages and spending vigorously before prices can further accelerate.
The Fed officials noted that employers were resisting layoffs even as the economy slowed, apparently “keen” to hold onto workers after a year and a half of severe labor shortages. The U.S. unemployment rate is 3.7 per cent, just above a half-century low.
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