A “large majority” of Fed officials support a slower pace of rate hikes soon, even as some warn that monetary policy will need to tighten more than expected next year, according to the account of their latest meeting.
Minutes of the November meeting, at which the Fed raised its benchmark interest rate by 0.75 percentage point for the fourth time in a row, indicate that officials are committed to pressing ahead with their campaign to stamp out high inflation.
However, the account also indicated that officials are ready to start raising rates in smaller increments while they assess the economic impact of the most aggressive tightening campaign in decades.
According to the minutes, “a slower pace in these circumstances would better allow the committee to assess progress toward its goals of maximizing employment and price stability.”
The calculation, released on Wednesday, showed that some Fed officials believe they will have to squeeze the economy more than they initially expected because inflation has shown “little signs so far of abating” — even if they get there with a smaller rate hike. Some also argued that it might be “beneficial” to wait to slow the pace of rate hikes until the policy rate was “more clearly in constrained territory” and that there were clearer signs that inflation was slowing.
However, noting the divisions among policymakers, others warned that there was a risk that the cumulative effect of higher interest rates could “beyond what is needed” to bring inflation under control.
And US stocks continued their gains after the issuance of the minutes. The S&P 500 rose 0.5 percent in mid-afternoon in New York, while the Nasdaq Composite, which is stacked with technology companies most sensitive to changes in interest rate expectations, rose 1 percent.
In government bond markets, the yield on 10-year US Treasury notes, which is seen as a proxy for global borrowing costs, fell 0.05 percentage point to 3.71 percent. The two-year policy-influenced yield decreased 0.04 percentage point to 4.48 percent. Both yields, which move inversely to debt instrument prices, were broadly flat in the run-up to publication of the minutes.
After the latest rate decision, the federal funds rate now hovers between 3.75 percent and 4 percent, a level that senior officials say will begin to directly dampen demand and weak consumer spending.
Since rate hikes take time to fuel the economy, Fed policymakers have proposed a “cut” to a half-point rate hike as soon as the next meeting in December, when their campaign to tighten monetary policy enters a new phase.
According to the minutes, officials engaged in a long discussion about the deferred effects of tightening monetary policy. They noted that interest rate-sensitive sectors such as housing have adjusted quickly, but “the timing of the effects on macroeconomic activity, the labor market and inflation remains not entirely certain.”
At a news conference earlier this month, Chairman Jay Powell said the level at which the federal funds rate hits will exceed the 4.6 percent level that most Fed officials predicted just two months ago.
His warning of a higher “final rate” came amid mounting evidence that price pressures are becoming embedded in a broader range of goods and services even as the pace of consumer price growth slows.
Since then, many policymakers have said the federal funds rate would need to rise above at least 5 percent in order to return inflation to the Fed’s 2 percent target. They also pledged to keep interest rates at a level they consider “constraining enough” for a long period of time until they are sure that the economy begins to cool down as hoped.
According to the minutes, Fed economists saw the possibility of a recession within the next year as “almost as likely” as their underlying expectation that the world’s largest economy would narrowly avoid a recession.
The minutes also noted growing concern about financial stability risks associated with the Federal Reserve’s plans to rapidly increase borrowing costs, citing recent turmoil in UK government bond markets that forced the Bank of England to intervene.
However, investors remain skeptical about the Fed’s commitment to further tightening monetary policy, especially as economic data has become increasingly mixed. Despite protests from Federal Reserve officials, market participants expect the US economy to slide into recession next year, forcing the central bank to cut interest rates.