A ‘substantial majority’ of Federal Reserve officials favor a rapid slowing in the pace of interest rate hikes, although some have warned that monetary policy should be tightened more than expected next year, according to an account minutes of their last meeting.
Minutes from the November meeting, in which the Fed raised its benchmark rate by 0.75 percentage points for the fourth straight time, suggest officials are determined to continue their campaign to stamp out high inflation.
However, the account also signaled that officials are ready to start raising rates in smaller increments as they assess the economic effect of the most aggressive tightening campaign in decades.
“A slower pace under these circumstances would better allow the committee to assess progress towards its goals of maximum employment and price stability,” according to the minutes.
The account, released on Wednesday, showed some Fed officials believe they will have to squeeze the economy more than they initially expected, as inflation has so far shown “few signs of slowing down. — even if they get there with smaller rate hikes. A few also argued that it could be “beneficial” to wait to slow the pace of hikes until the policy rate is “more clearly in restrictive territory” and there are clearer signals. that inflation slows down.
However, in a sign of divisions among policymakers, others warned there was a risk that the cumulative effect of rate hikes could “exceed what was necessary” to bring inflation under control.
The publication of the Fed minutes gave a new impetus to US equities. The S&P 500 ended the session up 0.6%, while the tech-heavy Nasdaq Composite gained 1%.
In government bond markets, the yield on the 10-year US Treasury note, considered a proxy for global borrowing costs, slipped 0.06 percentage points to 3.7%. The policy-sensitive two-year yield fell 0.04 percentage points to 4.48%. Both yields, which move inversely to debt prices, had been broadly flat before the minutes were released.
The dollar extended its declines in afternoon trade in New York, losing 0.9% against a basket of six peers.
Following the most recent rate decision, the fed funds rate is now hovering between 3.75% and 4%, a level that senior officials say will begin to dampen demand more directly and dampen consumer spending. .
Since rate hikes take time to trickle down to the economy, Fed policymakers have offered to “downgrade” to half-point rate hikes as soon as the next meeting in December, when their campaign monetary policy tightening will enter a new phase.
According to the minutes, officials engaged in a lengthy debate over the delayed effects of tighter monetary policy. They noted that interest-rate-sensitive sectors such as housing had adjusted quickly, but that “the timing of the effects on overall economic activity, the labor market and inflation was still quite uncertain.”
At a press conference earlier this month, Chairman Jay Powell said the level at which the federal funds rate will top will exceed the 4.6% level expected by most Fed officials a year ago. just a few months.
His warning of a higher “terminal rate” came amid mounting evidence that price pressures are embedding themselves across a wider range of goods and services, even as the pace of price growth to consumption is slowing down.
Many policymakers have since said the fed funds rate will need to rise above at least 5% to bring inflation back to the Fed’s 2% target. They also pledged to keep interest rates at a level they consider “sufficiently restrictive” for an extended period until they are confident the economy is beginning to calm as hoped.
According to the minutes, Fed economists estimated the possibility of a recession within the next year to be “almost as likely” as their baseline prediction that the world’s largest economy will avoid one. correctness.
The minutes also indicated heightened concern about the risks to financial stability associated with the Fed’s plans to rapidly raise borrowing costs, citing recent turmoil in UK government bond markets which forced the Bank of England to intervene.
However, investors continue to be skeptical of the Fed’s commitment to further monetary tightening, especially as economic data becomes increasingly mixed. Despite protests from central bank officials, market participants expect the U.S. economy to tip into a recession next year, forcing the Fed to cut interest rates dramatically.