Is the Federal Reserve Worried Markets Aren’t Taking its Aggressive Policies Seriously?

The take-home message from the Federal Reserve’s December policy meeting suggests policy makers are growing concerned over risks to the economy, whilst frustrated with the market’s lack of seriousness when it comes to the central bank’s resolve.

After hiking borrowing costs 50 basis points on December 14, market expectations moved into hawkish territory, particularly after FOMC members signalled interest rates would remain above 5% until 2024. The meeting’s minutes released on Wednesday show policy makers are still affirmed to bringing inflation back to the 2% target range, albeit via a slower pace of rate hikes, citing risks to economic growth. Still, policy makers stressed concerns that market participants aren’t taking the Fed’s resolve seriously enough.

“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 or a judgment that inflation was already on a persistent downward path,” read the statement. “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.” The comments referred to the run-up before last month’s rate hike, with Fed members displeased with the easing in financial conditions.

Policy makers gave themselves a pat on the back over October’s and November’s CPI figures, acknowledging they’ve made “significant progress” over the past 12 months on lowering inflation. But now, however, the central bank indicated it may be time to shift attention towards bracing the economy from a potential contraction, with some policy makers implying a recession in 2023 was a “plausible alternative.” Over the past year, the Fed embarked on one of the tightest policy cycles since the 1980s, but policy makers must now contend with potentially overshooting rate hikes 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,” the bank said.

Information for this briefing was found via the Federal Reserve and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.