Fed Officials Expect Tighter Rate Hikes Coming ‘Soon’

Federal Reserve officials earlier this month agreed that minor interest rate hikes should occur as soon as they assess the impact the policy is having on the economy, meeting minutes indicated Wednesday.

Reflecting statements made by multiple officials in recent weeks, the summary of the meeting indicated small rate hikes were on the way. Markets are broadly expecting the Federal Open Market Committee, which sets rates, to ease to a 0.5 percentage point increase in December, following four consecutive hikes of 0.75 percentage points.

While suggesting that minor moves were on the way, officials said they still see small signs of easing inflation. However, some committee members expressed concern about the risks to the financial system should the Fed continue to advance at the same aggressive pace.

“A substantial majority of participants believed that a slowdown in the pace of growth would soon be appropriate,” the minutes said. “The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding the importance of such an assessment.”

The minutes noted that the smaller hikes would give policy makers a chance to assess the impact of the succession of rate hikes. The next central bank interest rate decision is on December 12th. 14.

The summary notes that some members indicated that “slowing the pace of growth could reduce the risk of instability in the financial system”. Others said they would like to wait to slow the pace. Officials said they see the balance of risks to the economy now tilted to the downside.

Focus on finishing speed, not just pace

Markets were looking for clues not only about what the next rate hike might look like, but also how far policymakers think they need to go next year to make satisfactory progress against inflation.

Officials at the meeting said it was equally important for the public to focus more on how far the Fed will go with rates rather than “the pace of further hikes in the target range.” The minutes noted that the final rate is likely higher than officials had previously thought.

In recent days, officials have spoken largely in unison about the need to continue the fight against inflation, while also indicating that they can reduce the level of rate hikes. This means a strong probability of a 0.5 percentage point increase in December, but still an uncertain course after that.

Markets are expecting a few more rate hikes in 2023, bringing the funds rate down to around 5%, and then maybe some cuts before the end of next year.

The Federal Open Market Committee’s post-meeting statement added a sentence that markets interpreted as a signal that the Fed will make smaller hikes 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 developments and financial”.

Investors saw this as a nod to a reduced intensity of hikes following four consecutive hikes of 0.75 percentage point that took the Fed’s benchmark overnight lending rate to a range of 3.75-4%, the highest in 14 years.

When will the excursions end?

Several Fed officials have said in recent days that they expect a likely half-point move in December.

“They’re getting to a point where they don’t have to move so fast. That’s helpful because 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 point out that politics works with delays, so it helps to be able to go a little slower.”

Inflation data has shown some encouraging signs lately while remaining well above the central bank’s official 2% target.

The consumer price index in October rose 7.7% from a year ago, the lowest reading since January. However, one measure the Fed follows more closely, the Personal Consumption Spending Price Index excluding food and energy, showed an annual increase of 5.1% in September, up 0.2 percentage points from last year. August and the highest reading since March.

Those reports came out after the November Fed meeting. Several officials said they saw the reports positively, but will need to see more before considering easing policy tightening.

The Fed has recently come under some criticism that it may be too restrictive. The concern is that policymakers are too focused on backsliding data and fail to signal that inflation is falling and growth is slowing.

However, the Brit expects Fed officials to keep their foot on the brake until there are clearer signs that prices are falling. He added that the Fed is willing to risk an economic slowdown as it pursues its goal.

“They have risks both ways if they do too little and they do too much. They’ve been quite clear about the risks of inflation going out of the box and the need to do really big tightening as the biggest risk,” he said. a tough time to be Jay Powell”.

.

Leave a Comment

%d bloggers like this: