Federal Reserve officials agreed earlier this month that a small interest rate hike should come soon after they assess the policy’s impact on the economy, minutes of the meeting released Wednesday said.
Reflecting statements made by several officials over the past few weeks, the outcome of the meeting pointed to a small rate hike to come. Markets broadly expect the rate-setting Federal Open Market Committee to resign before a 0.5 percentage point rise in December after four consecutive 0.75 percentage point increases.
Officials are hinting that there will be less serious steps ahead, but say they still see no signs of lowering inflation. However, some committee members expressed concern about the risks to the financial system if the Fed continues to act at the same aggressive pace.
“A large majority of participants considered that a slowdown in growth is likely to be appropriate soon,” the minutes read. “The uncertain lags and magnitudes associated with the impact of monetary policy actions on economic activity and inflation were among the reasons this assessment was important.”
The minutes note that small hikes will give policymakers a chance to gauge the impact of successive rate hikes. The next decision of the central bank on the interest rate will be made on December 14.
The summary notes that several members indicated that “a slowdown in growth could reduce the risk of instability in the financial system.” Others said they would like to wait to slow down. Officials said they see the balance of risks to the economy currently skewed to the downside.
Focus on final speed, not just pace
Markets have been looking for clues not only about what the next rate hike might look like, but also about how far policymakers think they will have to go next year to make satisfactory progress against inflation.
Officials at the meeting said it was just as important for the public to pay more attention to how far the Fed would go with rates, rather than “the pace of further increases in the target range.”
The minutes note that the final rate is likely higher than previously thought. At the September meeting, the members of the committee determined the interest rate on the residual funds at about 4.6%; recent statements have shown that the level could exceed 5%.
Over the past few weeks, officials have largely spoken in unison about the need to continue to fight inflation, and have also indicated that they can lower their rate hikes. This means a high probability of a 0.5 percentage point rise in December, but still an uncertain course after that.
Markets are expecting a few more rate hikes in 2023, bringing the funds rate up to around 5% and then possibly some cuts before the end of next year.
The FOMC statement after the meeting added a proposal that markets interpreted as a signal that the Fed would make smaller increases going forward. The proposal 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 lag in which monetary policy affects economic activity and inflation, and economic and financial developments.”
Investors took it as a hint of a slowdown in hikes after four consecutive 0.75 percentage point hikes, pushing the Fed’s base overnight rate to the 3.75%-4% range, 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 coming to a point where they don’t have to act so fast. It’s helpful because they don’t know exactly how much they’ll have to tighten policy,” said Bill English, a former Fed official. with the Yale School of Management. “They emphasize that the policy works with delays, so it’s useful to be able to work a little slower.”
Inflation data has shown some encouraging signs of late, remaining well above the central bank’s official 2% target.
The consumer price index in October rose by 7.7% compared to last year, which is the lowest value since January. However, the metric the Fed is watching more closely, the non-food and energy personal consumption price index, posted a 5.1% year-on-year increase in September, up 0.2 percentage points from August, and is the highest value since March.
These reports came after the November meeting of the Fed. Several officials said they received the reports positively, but they would need to see more before they consider easing the policy tightening.
The Fed has come under some criticism recently for being able to tighten policy too much. The concern is that policy makers are too focused on the past and overlook signs of lower inflation and slower growth.
However, English expects Fed officials to collectively hold the brakes until there are clearer signals that prices are falling. He added that the Fed is ready to risk an economic slowdown in pursuit of its goal.
“They have risks in both directions if they do too little and they do too much. They have made it pretty clear that they see the risks of getting inflation out of the box and the need for really significant tightening as the biggest risk.” he said. “It’s hard to be [Fed Chairman Jerome] Powell.”