The US Federal Reserve has published minutes from its latest Federal Open Markets Committee (FOMC) meeting, in which it lifted the funds rate by 25 bps to 4.5–4.75 per cent.
Despite previously signalling a slowdown in monetary policy tightening off the back of swifter than expected progress towards its inflation target, the Fed is now foreshadowing additional hikes over the coming months.
“Members anticipated that ongoing increases in the target range would be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time,” the central bank minutes noted.
The Fed reiterated that future monetary policy decisions would involve considerations of the impact of cumulative tightening, as well as the lag impact of previous hikes to the funds rate.
“Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook.” the FOMC minutes read.
“They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals.
Members agreed that their assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.”
According to Stephen Miller, investments strategist at funds management firm GSFM, the Fed’s hawkish tone has come off the back of January’s consumer price index (CPI).
US inflation rose 0.5 per cent in January following a 0.1 per cent increase in December.
Mr Miller said markets have now “accepted the message” that the Fed’s primary goal is “inflation containment”.
Markets have priced in three additional hikes to the funds rate, with a terminal rate of between 5.25–5.5 per cent.
“Prior expectations regarding an easier stance of monetary policy in the second half of 2023 have been substantially unwound as markets digest the Fed’s ‘higher for longer’ message,” he said.
In Australia, the Reserve Bank has adopted a similar posture, signalling further increases to the cash rate over the coming months.
According to Mr Miller, the RBA would consider a 25 bps or 50 bps hike in March — the 10th consecutive increase — and “comfortably opt for the former”.
“The pandemic saw monetary policy assume unprecedented levels of accommodation. Viewed through that lens, policy adjustments through 2022 may have represented a partial return to some version of normality and perhaps significantly tighter conditions are yet required to meet the inflation challenge,” he said.
