Federal Reserve warns rates will stay high as it tries to tame inflation

Federal Reserve officials last month affirmed their resolve to bring down inflation and, in an unusually blunt warning to investors, cautioned against underestimating their determination to keep interest rates high for some time.

Going into the meeting, markets were pricing in interest-rate cuts in the second half of 2023.

Fed officials noted that “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 minutes of the Federal Open Market Committee’s December 13-14 meeting released in Washington on Wednesday.

US stocks pared gains following the report, while the Fed-policy sensitive two-year Treasury yield rose and the dollar remained lower.

US Federal Reserve chairman Jerome Powell says it is too soon to discuss interest rate cuts.Credit:Bloomberg

US central bankers raised the benchmark lending rate by half a percentage point at their gathering, slowing down after an aggressive string of four straight 75 basis-point increases. Officials also issued fresh forecasts that showed a hawkish tilt with more hikes projected in 2023 than investors expect.

“They don’t see light at the end of the tunnel yet with inflation,” said Derek Tang, an economist at LH Meyer in Washington. “They’re so alert of financial easing that’s ‘unwarranted’ that the scale should tilt to staying with 50 basis points in February. That’ll drive the message home.”

The minutes showed Fed officials intent on lowering inflation back toward their 2 per cent target at the risk of rising unemployment and slower growth.

“Several participants commented that the medians of participants’ assessments for the appropriate path of the federal funds rate in the summary of economic projections, which tracked notably above market-based measures of policy-rate expectations, underscored the committee’s strong commitment to returning inflation to its 2 per cent goal,” the minutes said. No official predicted rate cuts in 2023.

The Fed’s move last month extended its most aggressive tightening cycle since the 1980s. Starting from near zero in March, officials lifted their benchmark lending rate through successive meetings to a target range of 4.25 per cent to 4.5 per cent, the highest since 2007.