Fed officials expect to keep interest rates elevated for 'some time,' minutes show

Federal Reserve policymakers see more interest rate hikes ahead

Federal Reserve officials reaffirmed their commitment to combating inflation at their December meeting and indicated that interest rates could remain elevated for "some time" until there is clear evidence that consumer prices are falling.

Minutes from the U.S. central bank's Dec. 13-14 meeting released on Wednesday showed that policymakers worried that investors and financial markets could misinterpret their decision to raise interest rates more slowly as a sign they were ending their campaign to bring prices under control. Fed officials said that the smaller rate hike – 50 basis points, compared to the previous four 75-basis-point increases – "was not an indication of any weakening" and warned of continued risks on the inflation front.

Although inflation has shown early signs of cooling off, it remains stubbornly high. The consumer price index climbed by 7.1% in November from the previous year, down from a high of 9.1% recorded in June but about three times the pre-pandemic average. The minutes show that officials remain determined to hold rates high as long as needed in order to tame inflation, even if it means risking higher unemployment or slower economic growth.

"Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time," the minutes said. "In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy."


Federal Reserve Chairman Jerome Powell

Federal Reserve Chair Jerome Powell (Olivier Douliery/AFP via Getty Images/File / Getty Images)

The half-point increase, the seventh straight hike in 2022, pushed the federal funds rate to a range of 4.25% to 4.5% — the highest since 2007.

"The Fed minutes are a good reminder for investors to expect rates to remain high throughout all of 2023," said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. "Amid a persistently strong job market, it makes sense that fighting inflation remains the name of the game for the Fed."

He added, "Bottom line is that even though we flipped the calendar, the market headwinds from last year remain."

In addition to the large rate hike, Fed officials at their December meeting also laid out an aggressive path of rate increases for 2023. Economic projections released after the meeting showed policymakers expect rates to rise to 5.1% in 2023, a far higher level than the 4.6% rate officials last projected in September, according to the Federal Open Market Committee's dot plot of individual members' expectations.

Officials also indicated that economic growth will slow sharply next year and that the unemployment rate will march substantially higher to 4.6% as rate hikes bring the U.S. to the brink of a recession. The Fed expects the jobless rate to remain elevated in 2024 and 2025 as steeper rates continue to take their toll by pushing up borrowing costs.

During his post-meeting press conference last month, Fed Chairman Jerome Powell acknowledged that the central bank has more work to do in regard to tackling inflation.

"We still have some ways to go," he told reporters. "We will stay the course until the job is done."