Inflation target of 2% may not stop the next Fed rate freeze

The Fed can stop raising rates before inflation reaches 2% if officials believe the economy's already heading there without another increase.

September's meeting left most unconvinced, with strong spending and persistent price increases outweighing the strain expensive borrowing was putting on parts of the economy.

The minutes released Oct. 7 explain the thinking behind that month's unanimous decision to raise its main interest rate to 3.75%-4%.

Most participants expected another hike by year-end, but their reasons differed: many saw higher rates as insurance against inflation sticking around, while others thought the economy would need higher rates anyway.

Those views can overlap, but they leave different amounts of room for persuasion. Evidence that temporary price increases are fading could reassure someone seeking insurance, while an official who thinks spending is too strong would also want to see people and businesses spending less freely.

That discussion helps explain what could stop another hike, although officials didn't agree on a set of conditions that would rule it out.

Higher rates make borrowing more expensive and saving more attractive, discouraging some spending and making it harder for businesses to charge more. The effects take time, and they don't reach everyone equally: homebuyers may pull back while companies with plenty of cash keep investing.

The Fed can't produce oil or remove an import tax, so raising borrowing costs won't fix the shortages behind some price increases. It can reduce spending enough to make those increases harder to pass along, lowering the risk that an initial jump in costs turns into persistent inflation across the economy.

In September, officials described higher energy costs alongside heavy spending on the equipment and data centers needed for artificial intelligence.

Some businesses appeared better able to pass their costs to customers, and several participants pointed to continued price increases in services other than housing. Cheaper fuel would help those businesses, but customers willing to keep spending could still let them raise other prices.

Repeated reports showing slower price increases across different purchases would give the Fed more reason to wait. Inflation falling just means prices are rising more slowly, so groceries can still feel expensive while the data improves. Officials would look for evidence that businesses are losing the ability or need to keep charging more.

They'd also need to separate economic improvement from revisions to how it's measured. The minutes noted that a planned revision to the inflation calculation would reduce how much software prices and investment-management fees added to the reported rate.

Better measurement can improve policy decisions, but a lower reading from a revised calculation doesn't mean businesses have simply reduced their price increases.

Officials thought people still expected inflation to settle around the 2% goal over time, although they worried that more years above target could lead workers to seek larger pay increases and businesses to plan bigger price increases.

Slower price increases across more of the economy, with people still expecting inflation to come down, would give officials less reason to raise rates as a precaution before the target is reached.

The Fed's responsibility to support employment limits how far it should go in making borrowing more expensive.