Fed officials signal cautious approach to rates amid heightened uncertainty

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Federal Reserve officials regarded the U.S. economy’s outlook as particularly uncertain last month, according to minutes released Wednesday, and said they would “proceed carefully” in deciding whether to further raise their benchmark interest rate.

Such cautious views are generally seen as evidence that the Fed isn’t necessarily inclined to raise rates in the near future. Their next meeting is in three weeks.

Economic data from the past several months “generally suggested that inflation was slowing,” the minutes of the Sept. 19-20 meeting said. The policymakers added that further evidence of declining inflation was needed to be sure it would slow to the Fed’s 2% target.

Several of the 19 policymakers said that with the Fed’s key rate “likely at or near its peak, the focus” of their policy decisions should “shift from how high to raise the policy rate to how long” to keep it at economically restrictive levels.

And the officials generally acknowledged that the risks to Fed’s policies were becoming more balanced between raising rates too high and hurting the economy and not raising them enough to curb inflation. For most of the past two years, the Fed had said the risks were heavily tilted toward not raising rates enough.

Given the uncertainty surrounding the economy, the Fed left its key short-term rate unchanged at 5.4% at its September meeting, the highest level in 22 years, after 11 rates hikes over the previous 18 months.

The officials noted several sources of uncertainty. They include the strike by the United Auto Workers union against Detroit automakers; higher oil and gas prices; concern that an economically weaker China would slow growth in the United States; and the threat of an extended U.S. government shutdown. Since the September meeting, two of those threats have abated: Oil and gas prices have dropped. And a government shutdown has been avoided, at least until mid-November.

The minutes arrive in a week in which several Fed officials have suggested that a jump in longer-term bond rates could help cool the economy and inflation in the coming months. As a result, the Fed may be able to avoid a rate hike at its next two-day meeting, which ends Nov. 1. Futures markets prices show few investors expect a rate increase at that meeting or at the next one in December.

Overall inflation, as measured year over year, has dropped from a peak of 9.1% in June 2022 to 3.7% in August. The latest data on consumer price changes will be released Thursday, and economists expect it to show that annual inflation ticked down in September to 3.6%.

On Wednesday, Christopher Waller, an influential member of the Fed’s governing board, suggested that higher long-term bond rates, by making many loans costlier for consumers and businesses, are doing “some of the work for us” in fighting inflation. Waller also underscored the Fed’s cautious approach in his remarks in Park City, Utah, during a question-and-answer session.

“We’re in this position where we can kind of watch and see what happens,” Waller said.

But he also expressed more optimism about inflation than he has in the past, noting that the past three months of price changes, according to the Fed’s preferred measure, have been “very good.”

“If this continues,” Waller said, “we’re pretty much back to our target.”

At their meeting last month, Fed officials issued an optimistic set of projections that envisioned inflation falling over the next two years, with only a small increase in unemployment and modest economic growth. The forecast raised the prospect of a “soft landing” in which inflation would slow to the Fed’s 2% target without causing a deep recession.

Yet the projections also showed that the policymakers expected to keep their benchmark rate elevated well into 2024 to keep the economy from sending inflation up again. They showed that Fed officials expected to cut rates only twice next year. Previously, they had penciled in four rate cuts.

“We’re fairly close, we think, to where we need to get,” Chair Jerome Powell said at a news conference after the September meeting. “A soft landing is a primary objective. … That’s what we’ve been trying to achieve.”

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