November 2022 Fed Minutes:

The majority of the Fed favors a slowing pace of tightening soon

Federal Reserve officials agreed earlier this month that smaller rate hikes should happen once they evaluate the policy’s impact on the economy, the minutes published Wednesday show.

Reflecting statements made by multiple officials in recent weeks, the meeting summary pointed to small interest rate hikes coming up. Markets are widely expecting the Federal Open Market Committee, which sets interest rates, to step down to a 0.5 percentage point hike in December, following four consecutive 0.75 percentage point hikes.

While pointing out smaller steps ahead, officials said they still see little sign of abating inflation. However, some committee members expressed concern about the risks to the financial system if the Fed continues at the same aggressive pace.

“A substantial majority of participants judged that a slowdown in the rate of growth would likely be appropriate soon,” the minutes said. “The uncertain delays and magnitude associated with the effects of monetary policy measures on economic activity and inflation were some of the reasons cited for why such an assessment was important.”

The minutes noted that the smaller hikes would give policymakers a chance to evaluate the impact of the sequence of rate hikes. The next interest rate decision by the central bank is on December 14.

The summary noted 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 and pick up the pace. Officials said they now tilted the balance of risks to the economy downwards.

Focus on the final tempo, not just the tempo

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

Officials at the meeting said it was just as important for the public to focus more on how far the Fed will go with interest rates than the pace of further increases in the target range.

In recent days, officials have largely spoken in unison about the need to continue the inflation battle, while also signaling that they can reverse the level of rate hikes. That means there is a good chance of an increase of 0.5 percentage point in December, but after that an uncertain development.

Markets are expecting some more rate hikes in 2023, bringing the fund rate to around 5%, and possibly some cuts before the end of next year.

The statement after the meeting of the Federal Open Market Committee, which sets interest rates, added a sentence that was interpreted by markets 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 time lags through which monetary policy affects economic activity and inflation, and economic and financial developments .”

Investors took it as a nod to a lessening intensity of the hikes after four consecutive 0.75 percentage point hikes that pushed the Fed’s overnight money benchmark to a range of 3.75-4%, the highest in 14 years.

When do the walks 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 need to move as 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 emphasize that policies work with delays, so it’s helpful to be able to slow down a bit.”

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

The consumer price index was 7.7% higher in October than a year ago, the lowest level since January. However, a measure that the Fed tracks more closely, the price index for personal consumer spending excluding food and energy, showed an annual increase of 5.1% in September, up 0.2 percentage points from August and the highest value since March.

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

The Fed has recently been the target of some criticism that it may tighten too much. The concern is that policymakers are too focused on data based on the past and miss signs that inflation is fading and growth is slowing.

However, Engels expects Fed officials to keep their collective foot on the brakes until there are clearer signs that prices are falling. He added that the Fed is willing to risk a slowing economy in pursuit of its goal.

“They have risks in both directions of doing too little and doing too much. They’ve been pretty clear that they see the risks of off-the-beaten-path inflation and the need to do some really big tightening as the biggest risk,” he said. said, “It’s a tough time being Jay Powell.”

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