Fed Minutes Warn Investors Interest Rates May Be Higher For Longer

Inflation remains the central bank's top priority, according to the September meeting minutes released Wednesday by the Federal Open Market Committee.

What Investors Need To Know: The Fed's language on the economy was relatively bullish given recent elevated fears of a U.S. recession. The Fed reiterated its previous intentions to do whatever it takes to bring inflation down.

“Participants judged that the Committee needed to move to, and then maintain, a more restrictive policy stance in order to meet the Committee’s legislative mandate to promote maximum employment and price stability,” the Fed said in its minutes.

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The Fed also said it will likely need to maintain elevated interest rates for some time even after inflation has begun to decline.

“Many participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the 2% objective."

The FOMC also acknowledged that inflation had come in "above expectations" and was declining "more slowly than they had previously been anticipating."

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Why It’s Important: The minutes come after the Federal Reserve last month issued its third 0.75% interest rate hike in four months. The bond market is pricing in an 86% chance of another 0.75% rate hike in November, according to CME Group.

The Federal Reserve has been under pressure all year to raise interest rates aggressively to combat inflation, but it must also attempt to avoid plunging the U.S. economy into a recession.

The Consumer Price Index (CPI) was up 8.3% in August and remains at multidecade highs despite the best efforts of the Fed.

In September, the Fed projected 0.2% U.S. GDP growth in 2022 and 1.2% growth in 2023. The Fed is also projecting 2022 PCE inflation of 5.4% and an unemployment rate of 3.8%.

All 18 members are now projecting interest rates will reach 3% by the end of 2022. Twelve of the 19 FOMC members see rates rising to a range of between 4.5% to 4.75% or higher in 2023.

Markets React: The SPDR S&P 500 ETF Trust SPY traded higher by 0.1% after the Fed minutes reassured investors the economy is on solid footing for now and the Fed is willing to act with additional aggressive rate hikes if needed.

The yield on 10-year U.S. Treasury bonds dropped slightly Wednesday to 3.894% after hitting multiyear highs above 4% late last month.

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