© Reuters
Investing.com – Federal Reserve officials agreed earlier this month that it should come as they assess the impact of monetary policy (raising interest rates) on the economy, according to a report released Wednesday.
The summary of the meeting, which reflects statements made by several officials in recent weeks, indicated a slight increase in interest rates at upcoming meetings. Markets are widely expecting the Federal Open Market Committee, which sets a December hike, to step down, after four consecutive hikes of 0.75 percentage point.
Despite hinting that minor moves are on the way, officials said they still see few signs of easing inflation. However, some committee members expressed concern about the risks to the financial system if the Fed continues to move forward at the same aggressive pace.
The minutes stated that “the vast majority of participants considered it appropriate to slow the pace of growth in the foreseeable future”. “Legacy and uncertain volumes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons given for the importance of this assessment.”
The minutes indicated that small hikes would give policy makers an opportunity to assess the impact of subsequent price hikes.
The summary notes that some members noted that “slowing the pace of the increase could reduce the risk of instability in the financial system”. Others said they would like to wait to slow down. Officials said they see the balance of risks to the economy now tilting to the downside.
Markets have been looking for clues not only about what the next rate hike might look like, but also how far policymakers think they need to go next year to make satisfactory progress against inflation.
It was important for the public to focus more on how far the Fed would go with rates, officials said at the meeting, “and the evolution of the policy position since then has become a more important consideration in achieving the Fed’s goals.” committee with respect to the pace of further increases in the target band.”
earlier signals
In recent days, officials have spoken in unison about the need to continue fighting inflation, while also indicating that they can curb the level of interest rate hikes. This means there is a strong possibility of a 0.5 percentage point increase in December, but the subsequent trajectory remains uncertain.
Markets expect a small interest rate hike in 2023, which would bring the funds rate to around 5%, and then maybe some cuts before the end of the year.
The Federal Open Market Committee’s post-meeting statement added a sentence that was interpreted by markets as a signal that the Fed will make smaller hikes in the future. This sentence reads: “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments “.
Investors saw this as a sign of a less intense rally after four consecutive 0.75 percentage point hikes took the Fed’s key rate to range between 3.75 and 4%, the highest in 14 years.
Several Fed officials said in recent days that they expect a possible half-point move in December.
“They’re getting to a point where they don’t have to move so 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 at the Yale School of Management. “They point out that politics works with delays, so it helps to be able to move forward a little more slowly.”
Inflation is coming down
Inflation data has recently shown some encouraging signs, remaining well above the central bank’s official target of 2%.
October’s consumer price index rose 7.7% from a year ago, the lowest reading since January. However, a measure the Fed follows closely, the PCE excluding food and energy index, showed an annualized increase of 5.1% in September, up 0.2 percentage points from August and the highest reading from March.
These reports were released after the Federal Reserve meeting in November. Several officials said they saw the reports positively, but needed to see more before considering easing policy tightening.
The Fed has recently come under some criticism that it may be too restrictive. The concern is that policymakers focus too much on lagging data and miss signals that inflation is easing and growth is slowing.
