Federal Reserve minutes indicate interest rates will have to rise high enough to slow down the economy

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Signs of firming inflationary pressures abound

A majority of top Federal Reserve officials believe that interest rates will have to continue to increase until the economy slows down from the rising cost of borrowing, according to minutes of the central bank’s September meeting released on Wednesday.

Just how long policy would have to be restrictive was an open question, the minutes showed. A “few” officials thought policy would have to remain “modestly restrictive for a time” while an additional “number” thought policy would need to be restrictive only “temporarily.”

On the other hand, just a “couple” of officials indicated they would oppose a restrictive policy stance “in the absence of clear signs of an overheating economy and rising inflation.”

The minutes did not specify the level of rates that Fed officials believe would start to slow the economy.

U.S. stocks wavered between gains and losses after the release of the minutes.

Fed officials have said that a 3% fed funds rate would be the “long-run” neutral level of interest rates, neither boosting nor retarding growth. But they haven’t said that applies in the short run.

According to the minutes, officials only said “there is considerable uncertainty surrounding all estimates of the neutral federal funds rate.”

At the meeting, Fed officials voted to lift their benchmark federal-funds rate to a range between 2% and 2.25%. Officials agreed that, beyond September, “further gradual increases in the target range for the federal funds rate” would be needed. That’s a sign that another rate hike in December is likely.

A gradual approach would balance the risk of tightening policy too quickly and causing the economy to stall, and tightening too slowly, which could boost inflationary pressures, officials said.

The Fed has penciled in three moves for 2019. At the moment, the financial market has only one rate hike priced in for next year.

 

 

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