Senior Federal Reserve officials expect smaller interest rate hikes to “be appropriate soon” as the threat of a recession grows.
Although the Fed still expects rates to rise more than expected, senior officials are unsure how far they will go. Slower rate hikes, they say, would give them more time to assess the “delayed” effects on the economy in the face of the growing threat of a recession.
“Apart from a wild inflation report before the next meeting, 50 basis points seems very reasonable in December. But the Fed is clearly not done yet.
Fed economics staff said for the first time that a recession was possible next year, according to a detailed summary of the bank’s latest strategy session in early November.
Previous bank minutes did not mention the possibility of a recession.
The main US SPX stock gauges,
DJIA,
extended gains after Fed minutes release.
The Fed quickly raised a key US interest rate to an upper range of 4%, from near zero last spring, in an effort to rein in high inflation. Rising rates tend to reduce inflation by slowing the economy and depressing the demand for goods and labor.
Yet some economists and senior Fed officials also worry that the central bank could trigger a recession or prolonged economic weakness if rates rise too high.
Some members said there was a growing risk that Fed actions would “exceed what was necessary” to bring inflation down to acceptable levels.
In recent speeches, a few have suggested that a “pause” in rate hikes might be warranted by early next year to see how they affect the economy. A rapid easing of inflationary pressures could strengthen their position.
The inflation rate exploded earlier this year to a 40-year high of 9.1%, from near zero at the start of the pandemic. It has since slowed to 7.7%.
Earlier this month, the bank raised the so-called federal funds rate by three-quarters of a point to a range of 3.75% to 4% – the third big consecutive rate increase. Most US loans such as mortgages and auto loans are tied to the federal funds rate.
In December, the Fed should raise its rates again, but the markets are betting on a lower rate hike of half a point. The minutes also suggest that a smaller rate hike is likely.
“Absent a wild inflation report before the next meeting, 50 basis points seems very reasonable in December,” said senior economist Jennifer Lee of BMO Capital Markets. “But the Fed is clearly not finished yet.”
Top Fed officials have repeatedly said they plan to raise rates further in 2023 and then keep them high for an indefinite period to ensure inflation comes down.
Officials are less united as to the height of the rates. Some want to stop at around 5% while others suggest they might need to go higher.
Wall Street expects the Fed to raise its benchmark rate to 5% by next year.
The Fed’s aggressive stance stems from the biggest price hike since the early 1980s.
The Fed is aiming to bring inflation back to pre-pandemic levels of around 2%, but it acknowledges this could take some time.
Several members of the Fed also expressed concern that non-traditional financial institutions could amplify problems in the US economy if higher rates expose them to greater instability.
Cryptocurrency firm FTX’s troubles surfaced just as the Fed meeting took place.
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