Minutes of the meeting released on Wednesday showed earlier this month that Federal Reserve officials agreed that smaller interest rate hikes were imminent as they assessed the impact of policy on the economy.
A summary of the meeting, echoing statements made by many officials over the past few weeks, pointed to smaller rate hikes. Markets expect the Federal Open Market Committee to cut rates to a 0.5 percentage point increase in December after four consecutive 0.75 percentage point hikes.
Although they hinted at less drastic steps ahead, officials said they still saw few signs of easing inflation. However, some committee members expressed concern about the risks to the financial system if the Fed continues to move at the same aggressive pace.
“A large majority of participants decided that a slowdown in the pace of growth would soon be appropriate,” the minutes said. “The uncertain lags and magnitudes of the effects of monetary policy on economic activity and inflation were one of the reasons such an assessment was important.”
Minutes noted that smaller increases would give policymakers a chance to assess the impact of a succession of rate hikes. The next interest rate decision of the Central Bank is on December 14.
The summary noted that several members said that “slowing the pace of growth could reduce the risk of instability in the financial system.” Others said they wanted to wait to slow down. Officials said they see the balance of risks in the economy now tilting to the downside.
Focus on final speed, not just pace
Markets were looking for clues not only about what the next rate hike might look like, but also about how far policymakers would have to go next year to make satisfactory progress against inflation.
Officials at the meeting said it was equally important for the public to focus more on how far the Fed would go with rates than “the pace of further hikes within the target range.”
The minutes indicated that the rate was probably higher than officials had previously thought. At the September meeting, committee members penciled in a terminal fund rate of around 4.6%; Recent statements indicate that the level may exceed 5%.
Over the past few weeks, officials have spoken in unison about the need to continue to fight inflation, while signaling that they may pull back interest rate hikes. This means a 0.5 percentage point increase in December is strongly likely, but the course is still uncertain thereafter.
Markets expect a few more rate hikes, taking the funds rate to 5% in 2023, and then 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 would make smaller hikes ahead. That sentence said, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the effects of monetary policy on economic activity and inflation, and economic and financial developments.”
Investors saw that as a sign of the reduced intensity of hikes after four straight 0.75 percentage point hikes that pushed the Fed’s overnight lending rate to a 14-year high of 3.75-4%.
When will the rides end?
Several Fed officials have said in recent days that they expect a half-point move, likely in December.
Bill English, a former Fed official, said: “They’re getting to a point where they don’t have to move as fast. That’s helpful because they don’t know exactly how much tightening they’re going to have to do.” with the Yale School of Management. “They emphasize that politics works with delays, so it’s useful to be able to go a little slower.”
Recent inflation data has shown some encouraging signs, staying well above the central bank’s official target of 2%.
In October, the consumer price index increased by 7.7% from a year ago, the lowest since January. However, a more closely watched measure by the Fed, the personal consumption expenditures price index excluding food and energy, rose 5.1% year-on-year in September, up 0.2 percentage points from August and the highest since March.
These reports were released after the Fed’s November meeting. Several officials said they were positive about the reports but needed to see more before considering easing the tightening policy.
The Fed has recently been the target of some criticism that it may be tightening too much. The concern is that policymakers are focusing too much on backward-looking data, and there are no signs that inflation is easing and growth is slowing.
However, the British expect Fed officials to keep their collective foot on the brake until clearer signals come in that prices are easing. He added that the Fed is willing to risk a slowing economy to achieve its goal.
“They have risks both ways, if they do too little and if they do too much. They’re pretty clear that they see the risks of inflation going out of the box and the need for really big tightening as the biggest risk.” he said. “It’s a tough time to be [Fed Chairman Jerome] Powell.”