Federal Reserve officials agreed earlier this month that smaller interest rate increases should take place as they assess the policy’s impact on the economy, meeting minutes said. the meeting published on Wednesday.
Reflecting statements several officials have made over the past few weeks, the meeting summary pointed to lower rate hikes ahead. Markets generally expect the Federal Open Market Committee responsible for setting rates to return to an increase of 0.5 percentage points in December, after four consecutive hikes of 0.75 percentage points.
Although they hinted less severe moves were ahead, officials said they still saw few signs of an easing in inflation. However, some committee members expressed concern about the risks to the financial system if the Fed continued to move forward at the same aggressive pace.
“A substantial majority of participants felt that a slower pace of increase would likely soon be appropriate,” the minutes read. “Uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons given for the importance of such an assessment.”
The minutes noted that the smaller hikes would give policymakers a chance to gauge the impact of a succession of rate hikes. The central bank’s next interest rate decision is December 14.
The summary notes that a few members indicated that “the slowing of the pace of growth could reduce the risk of instability in the financial system”. Others said they would like to wait to slow down. Officials said they saw the balance of risks to the economy now tilted to the downside.
Focus on the final flow, not just the beat
Markets were looking for clues not only about what the next rate hike might look like, but also how far policymakers thought they would have to travel next year to make satisfactory headway against inflation.
Officials at the meeting said it was equally important for the public to focus more on how far the Fed will go with rates rather than “on the pace of further increases in the target range.”
The minutes noted that the ultimate rate is likely higher than officials had previously thought. At the September meeting, committee members had penciled in a terminal funding rate of about 4.6%; recent statements have indicated that the level could exceed 5%.
In recent weeks, officials have spoken largely in unison about the need to continue the fight against inflation, while indicating that they can reduce the level of rate hikes. This means a high probability of a 0.5 percentage point increase in December, but still uncertain development thereafter.
Markets expect a few more rate hikes in 2023, bringing the funds rate to around 5%, and then possibly some cuts before the end of next year.
The FOMC’s post-meeting statement added a sentence that markets interpreted as a signal that the Fed will make smaller increases going forward. That sentence read: “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Investors saw it as a nod to a reduced intensity of the hikes after four consecutive 0.75 percentage point hikes that took the Fed’s benchmark overnight borrowing rate to a range of 3, 75% to 4%, the highest in 14 years.
When will the hikes end?
Several Fed officials have said in recent days that they expect a likely half-point move in December.
“They’re getting to a point where they don’t need to act so quickly anymore. It’s helpful because they don’t know exactly how much tightening they’re going to have to do,” said Bill English, a former Fed official. with the Yale School of Management. “They insist that the policy works with lags, so it helps to be able to go a little slower.”
Inflation data has recently shown encouraging signs while remaining well above the central bank’s official 2% target.
The consumer price index in October rose 7.7% from a year ago, the lowest since January. However, a measure the Fed tracks more closely, the personal consumption expenditure price index excluding food and energy, posted a 5.1% annual rise in September, up 0.2 percentage points from from August and the highest reading since March.
These reports came out after the Fed’s November meeting. Several officials said they viewed the reports positively, but would need to know more before considering easing the policy tightening.
The Fed has recently been the target of some criticism that it may be too tight. The worry is that policymakers are focusing too much on historical data and missing signs that inflation is receding and growth is slowing.
However, English expects Fed officials to keep their collective foot on the brake until there are clearer signals that prices are heading lower. He added that the Fed is willing to risk a slowing economy as it pursues its target.
“They have risks both ways, if they do too little and too much. big crunch as the biggest risk,” he said. “It’s a hard time to be [Fed Chairman Jerome] Powell.”
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