According to meeting minutes released on Wednesday, officials at the Federal Reserve agreed earlier this month that they should evaluate the impact of policy on the economy and implement smaller interest rate increases sooner rather than later.
The meeting summary reflected statements made by a number of officials over the past few weeks, indicating upcoming smaller rate increases.After four increases of 0.75 percentage points in a row, the Federal Open Market Committee, which sets rates, is expected to reduce its increase to 0.5 percentage points in December.
Officials stated that they still see few signs of inflation abating, despite hints that less drastic actions were on the horizon.However, if the Fed continues to move at such a rapid pace, some committee members expressed concern about the risks to the financial system.
According to the minutes, “a substantial majority of participants judged that a slowing in the pace of increase would probably soon be appropriate.”One of the reasons that such an assessment was important was because of the uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation.
The minutes noticed that the more modest climbs would allow policymakers an opportunity to assess the effect of the progression of rate climbs.Dec. 14 is when the central bank will make its next rate decision.
A few members said, “slowing the pace of increase could reduce the risk of instability in the financial system,” according to the summary.Others said they would prefer to wait for the pace to slow down.Officials claimed that the economy’s risk profile is currently skewed toward the negative.
Markets had been looking for clues about not only what the next rate hike might look like but also how far policymakers think they’ll have to go next year to make progress against inflation that is satisfactory. Focus on end rate, not just pace.
At the meeting, officials stated that “the pace of further increases in the target range” was just as important as how far the Fed will go with rates.
The final rate is probably higher than officials had anticipated, according to the minutes.At the September meeting, panel individuals had planned for a terminal finances rate around 4.6%;Recent statements have suggested that the level might be higher than 5%.
Over the past few weeks, officials have largely agreed on the need to fight inflation while also indicating that they can reduce the rate of increase.This indicates that a 0.5 percentage point increase is highly likely in December, but the course after that remains uncertain.
The markets anticipate a few more rate increases in 2023, bringing the funds rate to around 5%, followed by possible reductions before the end of the following year.
The markets interpreted the addition of a sentence to the FOMC’s post-meeting statement as a sign that the Fed will proceed with fewer increases.That sentence read, “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” when determining the pace of future increases in the target range.
Investors saw it as a sign that there would be fewer hikes in the future. The Fed’s benchmark overnight borrowing rate had reached its highest level in 14 years with four 0.75 percentage point increases.