The Federal Reserve (Fed) has published the minutes of its last meeting in December, which reveal some insights into its monetary policy outlook for the next few years. According to the document, the Fed expects to keep the federal funds rate near zero until at least 2023, and then start to gradually raise it in 2024, depending on the economic conditions and inflation expectations. The Fed also plans to continue its asset purchase program at the current pace of $120 billion per month until it sees substantial progress in the labor market and inflation.
The minutes show that the Fed is cautious about the recovery of the US economy, which has been hit hard by the coronavirus pandemic and its related restrictions. The Fed acknowledges that the fiscal stimulus passed by Congress in December will provide some support to households and businesses, but it also warns that the pace of vaccinations and the evolution of the virus pose significant uncertainties for the outlook. The Fed also notes that some sectors of the economy, such as leisure and hospitality, have been particularly affected by the pandemic and may take longer to recover.
The Fed’s decision to signal interest-rate hikes in 2024 reflects its confidence that inflation will eventually rise to its 2% target, after being persistently below it for many years. The Fed has adopted a new framework that allows it to tolerate inflation moderately above 2% for some time, in order to make up for past shortfalls and support maximum employment. The Fed believes that this approach will enhance its credibility and anchor inflation expectations at a level consistent with its mandate.
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The minutes of the Fed’s December meeting offer a glimpse into the thinking of the central bank as it navigates a challenging and uncertain economic environment. The Fed is committed to using all its tools to support the recovery and achieve its goals of price stability and full employment. However, the Fed also emphasizes that its policy actions depend on the actual and expected developments in the economy, and that it will adjust its stance as appropriate if the situation changes.
In a recent statement, the Federal Reserve recognized the positive impact of the latest relief package approved by the lawmakers in the last month of 2023. The central bank said that the additional fiscal measures will help both households and businesses cope with the economic challenges caused by the pandemic. The Fed also reiterated its commitment to use its full range of tools to support the recovery and ensure price stability.
Some of the tools that the Fed has been using include keeping the federal funds rate near zero, buying large amounts of Treasury and mortgage-backed securities, and providing liquidity and credit to financial institutions and markets. The Fed also said that it will continue to monitor the economic and health situation and adjust its policy accordingly.
The relief package that the Fed referred to be the $900 billion bill that Congress passed on December 21, 2023, after months of negotiations. The bill included direct payments of $600 to most Americans, enhanced unemployment benefits of $300 per week, aid for small businesses, schools, health care providers, and state and local governments, among other provisions. The bill was intended to provide a bridge until more vaccines are distributed and the economy can reopen more fully.
The US inflation rate rose to 3.4% in December 2023
Meanwhile, the latest data from the Bureau of Labor Statistics shows that the US inflation rate rose to 3.4% in December 2023, the highest level since January 1991. This was higher than the consensus forecast of 3.2% and reflects the ongoing impact of supply chain disruptions, labor shortages, and rising energy costs on consumer prices.
The inflation rate measures the change in the average prices of goods and services purchased by households over a year. It is one of the key indicators of the health of the economy and the purchasing power of consumers. A moderate level of inflation is generally considered beneficial, as it signals a growing demand for goods and services and encourages investment and innovation. However, a high and persistent level of inflation can erode the value of money, reduce the real income of consumers, and increase the cost of borrowing.
The main drivers of inflation in December were transportation, housing, and food. Transportation costs rose by 11.9% year-over-year, driven by a 49.6% surge in gasoline prices and a 37.3% increase in used car and truck prices. Housing costs, which account for about a third of the consumer price index, rose by 4.1%, reflecting higher rents and home prices. Food costs rose by 6.3%, with both food at home and food away from home posting significant increases.
The core inflation rate, which excludes the volatile food and energy components, also rose to 3.1% in December, above the forecast of 2.9%. This suggests that inflationary pressures are not only coming from transitory factors, but also from underlying structural changes in the economy.
The Federal Reserve, which has the dual mandate of maintaining price stability and maximum employment, has been facing a difficult trade-off between fighting inflation and supporting the economic recovery from the pandemic. The Fed has maintained its ultra-accommodative monetary policy stance throughout 2023, keeping its benchmark interest rate near zero and continuing its monthly asset purchases of $120 billion. The Fed has argued that the current inflation spike is largely temporary and will subside as the supply-demand imbalances are resolved.
However, some analysts and investors have questioned the Fed’s credibility and patience in dealing with inflation, especially as inflation expectations have risen to multi-year highs. The Fed has signaled that it will begin to taper its asset purchases in early 2024 and raise its interest rate by mid-2024, but some market participants have priced in a faster and more aggressive tightening cycle.
The inflation outlook for 2024 remains uncertain and depends on several factors, such as the evolution of the pandemic, the pace of global economic growth, the response of fiscal and monetary policies, and the behavior of consumers and businesses. The Fed will have to balance its policy actions carefully to avoid triggering a stagflation scenario, where high inflation is accompanied by low growth and high unemployment.