WASHINGTON: US Federal Reserve officials expect interest rates will need to remain high “for some time” to tackle stubborn inflation, according to minutes of the most recent rate decision published on Wednesday. The Fed announced last month that it would continue to hold interest rates at a 22-year high, and penciled in up to three rate cuts in 2024, sending US stock markets surging to new records.

Since then, Fed officials have looked to dampen the buoyant market expectations that cuts were imminent, stressing that inflation remains stuck above the central bank’s long-run target of two percent. In December, the Fed’s rate-setting committee “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably” towards target, according to minutes of the meeting published Wednesday.

The document did not delve into details of a discussion Fed Chair Jerome Powell alluded to in last month’s press conference, about when it would be appropriate to start cutting rates. Since peaking in 2022, the Fed’s favored inflation gauge has fallen sharply, reaching an annual rate of 2.6 percent in November. So-called core inflation, which strips out volatile food and energy prices, also cooled last month to an annual rate of 3.2 percent.

At the same time, economic growth has shown signs of moderating, the job market appears to be softening, and the unemployment rate has remained close to record lows. These facts have fueled hopes the Fed is on track to bring down inflation while avoiding a damaging recession, a rare feat known as a “soft landing.”

Speaking at a conference in Raleigh, North Carolina, on Wednesday, Richmond Fed President Tom Barkin said a soft landing “is increasingly conceivable but in no way inevitable.” But Barkin, who is a voting member of the Fed’s rate-setting committee this year, added that there was “no autopilot,” and that policymakers would continue to be guided by the incoming data. Futures traders have assigned a probability of more than 90 percent that policymakers will vote to hold the Fed’s key lending rate steady again when they meet later this month, according to CME Group data.

Manufacturing contracts

Manufacturing activity in the United States remained weak in December, shrinking for a 14th consecutive month according to survey data released Wednesday. The Institute for Supply Management’s (ISM) manufacturing index was 47.4 percent in the final month of 2023, up from November’s 46.7 percent figure.

The figure, though slightly higher than the consensus estimate, was still firmly under the 50-point mark separating growth from contraction. “The US manufacturing sector continued to contract, but at a slightly slower rate in December,” said ISM survey chief Timothy Fiore in a statement. “None of the six biggest manufacturing industries registered growth in December,” he added. Fiore noted that demand eased as well, with the new orders index contracting at a quicker rate and the new export orders index “essentially flat.” Overall, the manufacturing sector has been weak “thanks in large part to constrained capital spending,” said economists at Pantheon Macroeconomics.

But sentiment should improve with a fall in interest rates this year. “Anticipation of the US Federal Reserve holding off on interest-rate changes will encourage more companies to spend on capital investments again,” said an ISM respondent in the computer and electronic products sector. “As budgets get approval after the start of the calendar year, this should help drive investment and increase manufacturing activity once again,” the respondent added.

The Fed has lifted the benchmark lending rate rapidly since early 2022, making borrowing more expensive as it sought to cool demand and curb surging inflation. But the central bank has held rates steady at recent policy meetings, while optimism grows that rate cuts are on the way. Economists at Pantheon expect an eventual rebound in manufacturing and the interest-sensitive housing sector. They warned however that the boost to GDP growth would likely be “offset by softer growth in real consumption spending, where the lagged effect of the prior surge in rates has yet to fully work through.” — AFP