The Fed is looking at slower rate hikes as the threat of recession deepens

Senior Federal Reserve officials expect smaller rate hikes to be “appropriate soon” as the threat of a recession deepens.

While the Fed still expects rates to rise higher than previously forecast, senior officials aren’t sure how much further they will go. Slower rate hikes, they say, would give them more time to evaluate the “lagging” effects on the economy amid the growing threat of a recession.

“Barring a wild inflation report for the next meeting, 50 basis points in December sounds very reasonable. But the Fed is clearly not done yet.”

The Fed’s economic staff first said a recession was possible next year, according to a detailed summary of the bank’s latest strategy session in early November.

The bank’s previous minutes did not mention the possibility of a recession.

The major US stock gauges SPX,
+0.53%

DJIA,
+0.41%
extended gains after the release of the Fed minutes.

The Fed quickly raised a key US interest rate from near zero to a top range of 4% last spring in an effort to curb high inflation. Rising rates tend to reduce inflation by slowing the economy and depressing demand for goods and labor.

Still, some economists and senior Fed officials also worry that the central bank could trigger a recession or a period of prolonged economic weakness if interest rates go too high.

Some members said there was a growing risk that the Fed’s actions would “go beyond what was necessary” to bring inflation back to acceptable levels.

In recent speeches, a few have suggested that a “pause” in rate hikes early next year could be warranted to see how they affect the economy. A quick relief from inflationary pressures could bolster their case.

The inflation rate exploded earlier this year to a 40-year high of 9.1% from near zero during the early stages of the pandemic. It has since slowed to 7.7%.

Earlier this month, the bank raised the so-called Fed Funds rate by three-quarters of a point to a range of 3.75% to 4% – the third major rate hike in a row. Most US loans such as mortgages and car loans are tied to the Fed Fund Rate.

In December, the Fed is likely to raise rates again, but markets are betting on a smaller half point hike. The minutes also suggest that a smaller rate hike is likely.

“Barring a wild inflation report for the next meeting, 50 basis points in December sounds very reasonable,” said BMO Capital Markets senior economist Jennifer Lee. “But the Fed is clearly not done yet.”

Senior Fed officials have repeatedly said they plan to raise rates further in 2023 and then keep them high indefinitely to ensure inflation eases.

Officials are less unanimous about how high the rates will go. Some want to stop at around 5%, while others suggest they may need to go higher.

Wall Street expects the Fed to raise interest rates to 5% by next year.

The Fed’s aggressive stance stems from the biggest price increase since the early 1980s.

The Fed is aiming to bring inflation back to pre-pandemic levels of around 2%, but they recognize it may take time.

Several Fed members also expressed concern that nontraditional financial institutions could add to the problems for the US economy if higher interest rates exposed them to greater instability.

The troubles at the crypto-currency company FTX came to the fore just as the Fed meeting took place.

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