Daily Management Review

Minutes Show That US Fed Officials Expect Smaller Rate Hikes 'Soon'


Minutes Show That US Fed Officials Expect Smaller Rate Hikes 'Soon'
According to meeting minutes released recently, Federal Reserve officials agreed earlier this month that smaller interest rate increases should occur soon as they assess the impact of policy on the economy.
The meeting summary indicated that smaller rate hikes were on the way, echoing statements made by multiple officials in recent weeks. Markets widely expect the Federal Open Market Committee to hike interest rates by 0.5 percentage point in December, after four consecutive 0.75 percentage point hikes.
Despite hints that less drastic measures were on the way, officials said they saw few signs of inflation abating. However, some committee members expressed concern about the risks to the financial system if the Fed continues to act aggressively.
“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” the minutes stated. “The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important.”
The minutes stated that the smaller hikes would allow policymakers to assess the impact of the rate hikes in succession. The central bank's next interest rate decision is scheduled for December 14.
According to the summary, a few members indicated that "slowing the pace of increase could reduce the risk of financial system instability." Others expressed a desire to slow down the pace. Officials believe the balance of risks to the economy has shifted to the downside.
Markets were looking for clues not only about the next rate hike, but also about how far policymakers believe they'll have to go next year to make satisfactory progress against inflation.
Officials at the meeting stressed the importance of the public focusing on how far the Fed will go with rates rather than "the pace of further increases in the target range."
According to the minutes, the final rate is likely to be higher than officials previously estimated. Committee members had penciled in a terminal funds rate of around 4.6% at the September meeting; recent statements have indicated that the level could exceed 5%.
Over the last few weeks, officials have largely spoken in unison about the need to maintain the inflation fight while also indicating that rate hikes can be scaled back.
That implies a strong likelihood of a 0.5 percentage point increase in December, but an uncertain path following that.
Markets anticipate a few more rate hikes in 2023, raising the funds rate to around 5%, followed by some rate cuts before the end of the year.
The FOMC's post-meeting statement included a sentence that markets interpreted as a signal that the Fed will be doing smaller increases in the future.
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 interpreted it as a hint of a slower pace of hikes following four straight 0.75 percentage point increases that raised the Fed's benchmark overnight lending rate to 3.75%-4%, the highest in 14 years.
Several Fed officials have recently stated that they expect a half-point increase in December.
“They’re getting to a point where they don’t have to move so quickly. That’s helpful 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 the Yale School of Management. “They emphasize policy works with lags, so it’s helpful to be able to go a little bit more slowly.“
Inflation data has recently shown some encouraging signs, despite remaining well above the central bank's official target of 2%.
The consumer price index rose 7.7% year on year in October, the lowest reading since January. However, the personal consumption expenditures price index excluding food and energy, which the Fed closely monitors, rose 5.1% year on year in September, up 0.2 percentage points from August and the highest reading since March.
These reports were released following the November Fed meeting. Several officials said they were encouraged by the reports but would need to see more before considering loosening policy restrictions.
The Fed has recently come under fire for potentially tightening too much. The concern is that policymakers are overly focused on historical data, missing signs that inflation is fading and growth is slowing.
English, on the other hand, believes that Fed officials will keep their collective foot on the brake until there are clearer signs that prices are falling. He also stated that the Fed is willing to risk a slowing economy in order to achieve its goal.
“They have risks in both directions, if doing too little and doing too much. They’ve been fairly clear that they view the risks of inflation getting out of the box and the need to do a really big tightening as the biggest risk,” he said. “It’s a hard time to be [Fed Chairman Jerome] Powell.”