Fed Confirms Inflation Remains Bigger Priority Than Employment

Interest rate hikes to continue in 2023, with no easing in sight

Jerome Powell presenting a graph

Drew Angerer / Getty Images

Key Takeaways

  • Minutes from the Federal Reserve's December meeting reiterated the central bank's resolve to control inflation above all else.
  • Fed officials expect a resilient labor market throughout 2023.
  • Markets see-sawed with stocks and bonds ending the day in the green despite the Fed's stance.

Concern that inflation might prove "more persistent than expected" remains the driving force behind the Federal Reserve's ongoing campaign of interest rate hikes, outweighing worries about the detrimental impact those hikes may have on the economic growth, employment, and financial markets.

That's the assessment members of the central bank's policymaking committee made in mid-December, according to minutes released Wednesday -- two days ahead of a closely watched U.S. jobs report.

The Federal Open Market Committee (FOMC) in December raised its benchmark rate by 50 basis points (bps) to 4.25-4.50%, the highest in 15 years. The minutes released today confirmed that rate hikes likely will continue, with no reversal of those increased rates in sight.

"No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023," the minutes stated. "Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time."

Inflation Fight Outweighs Recession Concerns

Though "a couple of participants noted that risks to the inflation outlook were becoming more balanced," the minutes made clear that Fed officials believe slowing interest rate hikes carries more risk of failing to thwart inflation than maintaining a steady string of rate hikes risks generating a steep recession.

"In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy," the minutes stated.

U.S. inflation soared to its highest level in 40 years in 2022. The Fed's preferred inflation measure, the personal consumption expenditures (PCE) index, fell to 5.5% in November, down from its peak of 7% in June. The Consumer Price Index (CPI) in November fell for the fifth month to 7.1%, down from a peak of 9.1% in June.

Despite improvement, those figures remain considerably higher than the Fed's 2% target, and Wednesday's minutes confirmed the commitment of Fed officials to meeting that target. The minutes also stated that the FOMC will determine the scope of individual rate hikes on a "meeting-by-meeting" basis. Its next meeting will take place Jan. 31-Feb. 1, when investors expect another rate hike of at least 25 bps.

Jobs Market May Hold the Key

As the Fed assesses the impact of its rate hikes, the U.S. jobs market will remain a key focus, and tight labor conditions show little sign of easing soon.

Economists surveyed by Bloomberg estimate average hourly earnings—scheduled to be reported Friday—rose 5% in 2022, a slight decline from the 5.1% increase over the 12-month period ending in November. The unemployment rate is expected to remain steady at a near-historic low of 3.7% for December, when the U.S. economy added an estimated 200,000 jobs.

The Fed does not expect the U.S. employment market to weaken substantially in 2023, with the unemployment rate not moving "above the staff's estimate of its natural rate" until late 2024.

Investors had a somewhat muted reaction to the release of the December minutes. U.S. stocks rallied earlier in the day, then retraced some gains after the 2 p.m. ET release before surging again just prior to the end of the day's trading. The S&P 500 Index closed up 0.8% at 3,852.97. Bonds also rose, with the yield on the benchmark 10-year U.S. Treasury note falling 8 bps to 3.71%.

Article Sources
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  1. FederalReserve.gov. "Minutes of the Federal Open Market Committee December 13-14, 2022."

  2. Tradingeconomics.com https://tradingeconomics.com/united-states/pce-price-index-annual-change

  3. Bloomberg "Fed Affirms Inflation Resolve, Pushes Back Against Rate-Cut Bets" https://www.bloomberg.com/news/articles/2023-01-04/fed-affirms-inflation-resolve-signals-concern-on-market-views

  4. Bloomberg. "US Jobs Market Likely to Show Still-Tight Labor Market."

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