Fed minutes: No rate cuts in 2023, inflation risk remains in focus

No Federal Reserve officials thought it’d be appropriate to begin cutting rates in 2023, and officials worried easing financial conditions could complicate the central bank's efforts to bring down inflation, according to internal discussions at the Fed's policy meeting three weeks ago.

Minutes from the central bank's December policy meeting released Wednesday showed while Fed officials welcomed easing October inflation data, they stressed it would take substantially more evidence of progress to be confident inflation was coming down in a sustained manner.

Officials noted the Fed would need to maintain a “restrictive policy stance” until data gave central bankers confidence inflation pressures were easing.

Officials suggested price pressures could prove to be more persistent than anticipated, noting the job market has remained strong for longer than anticipated. Several participants said the Fed’s median projection for rates to peak at 5.1%, above market expectations, underscored the Fed’s commitment to bring down inflation.

A remaining question for investors: At what pace will the Fed raise rates in future policy meetings after slowing down to 50 basis points in December? The minutes suggested Fed officials will base decisions on future rate hikes on data and the implications for inflation and growth. The committee will make decisions meeting by meeting, according to the minutes.

"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%, 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."

Officials viewed the job market as very strong, noting an unemployment rate near historically low levels, still strong payroll gains, a high level of job vacancies, and elevated nominal wage growth. Several participants commented that there were tentative signs of labor market imbalances improving, including declines in job openings and quits over the second half of 2022.