Federal Reserve officials earlier this month agreed that a smaller increase in interest rates should happen as soon as they evaluate the policy’s impact on the economy, meeting minutes released Wednesday indicated.
Reflecting the statement that some officials have made during the past few weeks, the summary of the meeting points to Small speed hikes come. The broad market expects the Federal Open Market Committee rate-setting to step down to a 0.5 percentage point increase in December, following four straight 0.75 percentage point hikes.
Despite indications that smaller movements are ahead, officials say they are still watching little sign of abating inflation. However, some members of the committee expressed concern about the risk to the financial system should the Fed continue to press forward at the same aggressive pace.
“Most of the participants think that the slowdown in the rate of increase is likely to be soon,” said the minutes. “The definite lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited as to why such an assessment is important.”
The minutes noted that small hikes will give policymakers the opportunity to evaluate the impact of the succession of rate hikes. The central bank’s next interest rate decision is December 14.
The summary stated that some members indicated that “slowing the rate of increase can reduce the risk of instability in the financial system.” Others said they wanted to wait to ease the pace. Officials say they see the balance of risks in the economy now tilting downward.
Markets have been looking for clues about not only the next rate hike but also for how far policymakers think they need to go next year to make satisfactory progress against inflation.
Officials at the meeting said it is just as important for the public to focus more on how far the Fed will go with rates rather than “from the next rate increase in the target range.” Minutes said the final level was likely higher than officials had previously suspected.
In recent days, officials have spoken largely in unison about the need to keep up the fight against inflation, while also showing they can pull back on the rate of rate hikes. That means a strong possibility of a 0.5 percentage point increase in December, but remains uncertain after that.
The market expects some more rate increases in 2023, taking the funding rate to around 5%, and then possibly some reductions before next year.
The statement after the meeting from the Federal Open Market Committee set a rate hike that markets interpreted as a signal that the Fed would make smaller increases. That sentence read, “In determining the future growth rate in the target range, the Committee will take into account the cumulative tightening of monetary policy, monetary policy lags affecting economic activity and inflation, and economic and financial progress.”
Investors saw it as a nod to the intensity of rate cuts after four 0.75 percentage point increases that took the Fed’s benchmark overnight lending rate to a range of 3.75-4%, the highest in 14 years.
Several Fed officials have said in recent days that they expect a possible half-point in December.
“They’re getting to the point where they don’t have to move so fast. That helps since they don’t know exactly how much tightening they’re going to have to do,” said Bill English, a former Fed official now. with Yale School of Management. “They emphasize the policy of going with lags, so it helps to be able to go a little bit slower.”
Recent inflation data has shown some encouraging signs while remaining above the central bank’s official target of 2%.
The Consumer price index in October rose 7.7% from a year ago, the lowest reading since January. However, the measure that the Fed follows more closely, the price index of personal consumption expenditures excluding food and energy, shows an annual increase of 5.1% in September, up 0.2 percentage points from August and the highest reading since March.
That report came out after the November fed meeting. Some officials said they saw the report positively but needed to see more before they considered easing up on policy tightening.
The Fed has been the target lately of some criticism that it may be too tightening. The worry is that policymakers are too focused on lagging data and are missing signs that inflation is falling and growth is slowing.
However, Britain expects Fed officials to keep their collective feet on the brakes until there are clearer signals that prices are falling. He added that the Fed is willing to risk the economy slowing because it pursues its goals.
“They have a risk in both directions if they do too little and too much. They have made it clear that they see the risk of inflation out of the box and having to do a big tightening as the biggest risk,” he said “These are difficult times Jay Powell.”