Senior officials at the Federal Reserve expect smaller rate hikes to be “appropriate soon” as the threat of a recession grows.
While the Fed still expects rates to move higher than previously forecast, senior officials aren’t sure how much further they will go. They said a slower rate hike would give them more time to assess the “lagging” effects on the economy amid growing recession risks.
“Without some wild inflation reports ahead of the next meeting, 50 basis points sounds very reasonable in December. But the Fed is clearly not over yet.”
The Fed’s chief economist for the first time said a recession is likely next year, according to a detailed summary of the bank’s final strategy session in early November.
The bank’s earlier minutes did not mention the possibility of a recession.
Major US stocks measure SPX,
extended gains after the release of the minutes of the Fed meeting.
The Fed briefly raised the US benchmark interest rate to as high as 4% from near zero last spring in an attempt to tame high inflation. A rising exchange rate tends to reduce inflation by slowing the economy and reducing the demand for goods and labor.
However, some economists and senior Fed officials also fear the central bank could spark a recession or prolonged period of economic weakness if interest rates rise too high.
Some members said there was a growing risk that the Fed’s actions “will go beyond what is necessary” to bring inflation down to acceptable levels.
In recent speeches, some have suggested that a “pause” in rate hikes could be warranted early next year to see how they affect the economy. A quick easing of inflationary pressures could strengthen their view.
The inflation rate exploded earlier this year to a 40-year high of 9.1% from near zero in the early stages of the pandemic. Since then, it has slowed down to 7.7%.
Earlier this month, the bank raised the so-called federal funds rate by three-quarters of a point to somewhere between 3.75% and 4% – the third-biggest rate hike in a row. Most U.S. loans such as mortgages and auto loans are tied to the federal funds rate.
In December, the Fed is likely to raise rates again, but the market is betting on a smaller 1/2-point increase. Minutes also suggest a smaller chance of a rate hike.
“Without some wild inflation reports ahead of the next meeting, 50 bps sounds very reasonable in December,” said BMO Capital Markets senior economist Jennifer Lee. “But the Fed is clearly not over yet.”
Senior Fed officials have repeatedly said they plan to raise rates further in 2023 and then keep rates high for an indefinite period to ensure inflation falls.
Officials have little agreement on how high the rate should go. Some want to stop at around 5% while others think they may need to go higher.
Wall Street expects the Fed to raise its benchmark interest rate to 5% next year.
The Fed’s belligerent stance stems from its biggest bull run since the early 1980s.
The Fed is aiming to bring inflation down to pre-pandemic levels of 2% or more, but it acknowledges that it could take some time.
Some members of the Fed also expressed concern that non-traditional financial institutions could exacerbate problems for the US economy if higher interest rates expose them to greater uncertainty. .
Troubles at crypto firm FTX surfaced as soon as the Fed meeting took place.