Fed "Must Raise Aggressively to Prevent Greater Pain"... Some Call for Slower Pace

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), expressed concern over the prolonged high inflation and reaffirmed its existing policy to continue additional interest rate hikes. However, some have raised a kind of 'speed adjustment theory,' warning against the adverse effects of excessive tightening amid rapidly increasing financial market volatility.

According to the minutes of the September Federal Open Market Committee (FOMC) regular meeting released by the Fed on the 12th (local time), the attendees agreed that "it is absolutely necessary to maintain a more restrictive policy stance to achieve the committee's mandate of maximum employment and price stability."

At the FOMC regular meeting held on August 20-21, the Fed took a third consecutive giant step (0.75 percentage point increase), raising the benchmark interest rate to 3.0-3.25%. This is the fastest pace of tightening since the early 1980s. Additionally, the Fed indicated a year-end median interest rate of 4.4% through the dot plot, implying a possible additional increase of 1-1.25 percentage points in the remaining two meetings.

The attendees expressed concern that "inflation remains unacceptably high and far exceeds the long-term target of 2%," noting that "recent inflation data generally exceeded expectations and is declining more slowly than previously anticipated." Specifically, they pointed out that core inflation remains at a high level, uncertainty around energy prices persists, wage increases are higher than expected, and supply chain disruptions continue.

Accordingly, many attendees emphasized that "it is appropriate to maintain high interest rates until there is clear evidence that inflation is falling to the 2% target." They explained the need to sustain a restrictive stance for as long as necessary.

They also stressed their willingness for further tightening, stating that raising rates more aggressively at this point is necessary to prevent much greater economic pain related to entrenched high inflation. The minutes also noted that historically, early monetary policy shifts have generally led to unfavorable outcomes.

On the other hand, some voices suggested a speed adjustment due to the recent sharp rise in economic uncertainty and financial market instability. Some attendees, while assessing the cumulative impact of policy adjustments on economic activity and inflation, stated that it would be appropriate to slow the pace of policy rate hikes "at some point." There was also a concern that total demand might be restricted more than the Fed's expectations.

The minutes reported, "Some participants mentioned that it would be important to fine-tune the pace of additional tightening policies to mitigate the risk of seriously adverse effects on the economic outlook in the currently very uncertain global economic and financial environment."

The minutes were released following the announcement of the U.S. Producer Price Index (PPI), a wholesale price index. The September PPI rose 8.5% year-on-year, exceeding market expectations. The month-on-month increase of 0.4% also surpassed forecasts, confirming persistent inflationary pressures. The U.S. Consumer Price Index (CPI) is scheduled to be released on the 13th.

This content was produced with the assistance of AI translation services.