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Fed aligned on smaller December rate hike, worried about market 'misperception'

Thursday, January 5, 2023

By Howard Schneider

WASHINGTON (Reuters) - All officials at the Federal Reserve's Dec. 13-14 policy meeting agreed the U.S. central bank should slow the pace of its aggressive interest rate increases, allowing them to continue increasing the cost of credit to control inflation but in a gradual way meant to limit the risks to economic growth.

The minutes of the meeting, which were released on Wednesday, showed policymakers still focused on controlling the pace of price increases that threatened to run hotter than anticipated, and worried about any "misperception" in financial markets that their commitment to fighting inflation was in any way flagging.

But officials also acknowledged they had made "significant progress" over the past year in raising rates enough to bring inflation down. As a result, the central bank now needed to balance its fight against rising prices with the risks of slowing the economy too much and "potentially placing the largest burdens on the most vulnerable groups" through higher-than-necessary unemployment.

"Most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance," the minutes said, indicating officials may be prepared to scale back to quarter-percentage-point increases as of the Jan. 31-Feb. 1 meeting, but also remained open to an even higher than anticipated "terminal" rate if high inflation persists.

Indeed, the minutes put a premium on explaining that the decision to move to smaller rate increases should not be construed by investors or the public at large as a weakening of its commitment to bring inflation back to the central bank's 2% target.

"Participants reaffirmed their strong commitment to returning inflation to the (Federal Open Market) Committee's 2% objective," the minutes said. "A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price stability goal."

Policymakers approved a half-percentage-point point rate increase at last month's meeting, a step back from the three-quarters-of-a-percentage-point hikes used through much of 2022.

"No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023," the minutes said.

Still, "many participants highlighted" that the Fed was now balancing dual risks - of faster-than-expected inflation on one side versus the possibility of a policy overshoot that "could end up being more restrictive than necessary."

"A slowing in the pace of rate increases at this meeting would better allow the Committee to assess the economy's progress ... as monetary policy approached a stance that was sufficiently restrictive."

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27-02-2024 15:55:28 (UTC+7)

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EUR/USD

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 EUR/USD1.0857↑ Sell
 GBP/USD1.2688↑ Sell
 USD/JPY150.18Neutral
 AUD/USD0.6553Sell
 USD/CAD1.3497↑ Buy
 EUR/JPY163.08↑ Sell
 EUR/CHF0.9546↑ Sell
 Gold2,048.20Neutral
 Silver22.887Neutral
 Copper3.8522↑ Sell
 Crude Oil WTI77.62↑ Sell
 Brent Oil81.68↑ Sell
 Natural Gas1.748↑ Sell
 US Coffee C180.10↑ Buy
 Euro Stoxx 504,867.15↑ Sell
 S&P 5005,069.53↑ Sell
 DAX17,455.45Neutral
 FTSE 1007,687.46↑ Sell
 Hang Seng16,790.80Neutral
 Small Cap 20002,028.97↑ Sell
 IBEX 3510,095.19↑ Sell
 BASF46.695Neutral
 Bayer28.77Sell
 Allianz246.00↑ Sell
 Adidas188.27↑ Sell
 Lufthansa7.240↑ Buy
 Siemens AG175.50↑ Sell
 Deutsche Bank AG12.220↑ Sell
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