Fed minutes for detailed discussion of endgame for rate hikes

WASHINGTON, Feb 22 (Reuters) – Minutes from the Federal Reserve’s last policy meeting on Wednesday are expected to outline the breadth of the debate at the U.S. central bank over how much more interest rates should be raised to curb inflation and cool the economy. Stronger than expected despite cash crunch.

Jan. 31-Feb. 1 meeting, the Fed raised its benchmark overnight interest rate by a quarter of a percentage point, returning to a more consistent rate-hike level after a year of consecutive 75-basis-point and half-percentage-point hikes.

In a news conference after the meeting’s conclusion, Fed Chairman Jerome Powell said a return to small rate hikes would allow for a more gradual hunt for a potential stop point, and officials said the session “talked a little bit about the path forward.” As the central bank nears the end of its hiking cycle.

But that session was held ahead of key data releases that showed unusually strong job gains in January, and a less-than-expected slowdown in inflation – the central bank’s preferred inflation report this week is expected to be released on Friday. Index no in January.

The central bank uses the personal consumption expenditure price index in setting its 2% inflation target. Economists polled by Reuters showed PCE excluding the more volatile food and energy components rose at a 4.3% annual pace last month, a slight improvement from the 4.4% jump in December. But on a month-on-month basis, that core inflation measure is actually expected to have increased to 0.4% from 0.3% in the previous period.

“The message now is that the U.S. economy is stronger than we previously thought … our risk is that inflation doesn’t slow or pick up again,” and that a larger-than-expected rate hike is needed, St. Louis Fed President James Bullard told CNBC on Wednesday.

Bullard has yet to change his own rate outlook much because of the latest data, and thinks a policy rate of 5.25% to 5.50% will be enough to keep inflation down this year.

Investors, however, have responded to the latest data by raising their own sense of where the Fed will end up.

Most don’t see the Fed returning to big half-percentage-point hikes, but they do see the Fed moving rates higher than previously expected and leaving them at higher levels for longer — a shift in sentiment that could be welcomed by Fed officials. The market has priced in their determination to bring inflation back to the 2% target.

Bilateral debate

The minutes, scheduled for release at 2 p.m. EST (1900 GMT), could show just how hawkish the Fed is leaning, especially at the last meeting where former Fed Vice Chairman Lyell Brainard demonstrated. He was one of the central bank officials most sensitive to the risks facing the economy under tight monetary policy, and the most detailed in outlining the reasons for the faster-than-expected decline in inflation.

Brainard, who left the Fed to chair President Joe Biden’s National Economic Council, anchored the more dovish side of the debate among those advising caution on further rate hikes because the economy has yet to fully adjust to what the Fed did. A full reversal of inflation may require even higher interest rate controls.

While there was little disagreement last year over what the central bank should do as inflation hit a 40-year high, the central bank is now “still in a bipartisan debate to determine the extent to which the economy has recovered so far. The monetary tightening needed to slow spending by businesses and households and a higher short-term neutral rate.” Reflecting the time delays, analysts at ISI Evercore wrote in an analysis ahead of the minutes’ release.

While the minutes of the last policy meeting were specifically dated, policymakers will update their views with new economic and interest rate forecasts released at the end of the central bank’s March 21-22 meeting, based on jobs and inflation data released since then.

Report by Howard Schneider; Additional reporting by Lindsey Dunsmuir; Editing by Don Burns and Paul Simao

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