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Minutes Show Fed Sticking to a ‘Restrictive’ Monetary Policy

Minutes of the Federal Reserve’s meeting earlier this month show that central bankers believe the economy is outperforming, the labor market is getting better balanced but that financial conditions will need to remain tight to contain inflation.

The summary of the November meeting released on Tuesday also reflected considerable uncertainty about the economy and its future path despite the Fed having raised interest rates to their highest levels in two decades.

“Participants generally noted a high degree of uncertainty surrounding the economic outlook,” the minutes noted. “As upside risks to economic activity, participants noted that the factors behind the resilience in spending could persist longer than expected. As downside risks, participants cited the possibility that the effects on households and businesses of the cumulative policy tightening and tighter financial conditions could be larger than expected, disruptions from a potential government shutdown, and the possibility that the resumption of student loan repayments could weigh on household spending by more than was expected.”

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They acknowledged that inflation had moderated, as shown by the fact it has dropped by about two-thirds since last summer, but that the job of bringing it down to the Fed’s 2% annual target will take a further slowing of the economy.

“Participants continued to view a period of below-potential growth in real GDP and some further softening in labor market conditions as likely to be needed to reduce inflation pressures sufficiently to return inflation to 2% over time,” the minutes said.

“FOMC minutes reinforced the ’wait and see’ policy stance was unanimous. Focus was on tightening in financial conditions and slowing in inflation and labor market. Not much new that we didn’t already know from the meeting,” Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, said on social media.

The Fed elected to keep interest rates on hold at its November meeting. The central bank will meet on Dec. 12 for a two-day meeting of its monetary policy committee, but the markets are pricing in no increase in interest rates.

Earlier Tuesday, the National Association of Realtors said that sales of existing homes fell 4.1% in October, much more than economists expected, as higher mortgage rates and limited inventory caused a weakening of the market. The median sales price, however, rose 3.4%.

But Jose Torres, senior economist at Interactive Brokers, says he believes a real estate recovery could be imminent as buyers who have been looking to own a house will jump when mortgage rates fall next year and sellers put more houses on the market.

“I’m expecting continued relief concerning inventory and mortgage rates as the Fed begins cutting rates in the first half of next year,” Torres says. He also forecasts a drop in prices of around 4% next year and that will also be a catalyst to the sector.

Torres is relatively sanguine about the economy next year, seeing growth slow without a wholesale slashing of payrolls.

“This year has been a surprise,” he says. “I expect sluggish growth into 2024” but with strong corporate balance sheets, “there’s no appetite to lay off workers en masse.”

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