Senior Federal Reserve officials expect smaller interest rate hikes “to be appropriate soon” as the threat of a recession grows.
Although the Fed still expects interest rates to rise higher than previously forecast, senior officials are unsure how much further they will go. Slower rate hikes, they say, will give them more time to assess the “lagged” effects on the economy amid the growing threat of a recession.
“Without some wild inflation report before the next meeting, 50 basis points sounds very reasonable in December.” But the Federal Reserve is clearly not done yet.”
The Fed’s economic staff said for the first time that a recession is possible next year, according to a detailed summary of the bank’s last policy session in early November.
The bank’s previous minutes did not mention the possibility of a recession.
The major US stock gauges SPX,
continued gains after the release of the Fed minutes.
The Fed quickly raised the key U.S. interest rate to the high end of the 4% range from near zero last spring in an effort to tame high inflation. A rise in interest rates reduces inflation by slowing the economy and suppressing 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 get too high.
Some members said there was a growing risk that the Fed’s actions “go beyond what is required” to bring inflation down to acceptable levels.
In recent remarks, some have suggested a “pause” in rate hikes is warranted until early next year to see how they affect the economy. A rapid easing of inflationary pressures could strengthen their case.
The rate of inflation exploded earlier this year to a 40-year high of 9.1% from near zero in 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 big rate hike in a row. Most US loans such as mortgages and auto loans are tied to the federal funds rate.
The Fed is likely to raise rates again in December, but markets are betting on less than a 1/2 point increase. The protocol also suggests that a smaller rate hike is likely.
“Barring some wild inflation report before the next meeting, 50 basis points sounds very reasonable in December,” 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 falls.
Officials are less united about how high the rates will be. Some want to stop at around 5%, while others suggest they may need to go higher.
Wall Street expects the Fed to raise the benchmark interest rate to 5% by next year.
The Fed’s aggressive stance stems from the biggest jump in prices since the early 1980s.
The Federal Reserve is aiming to reduce inflation to pre-pandemic levels of 2%, but they acknowledge that this may take some time.
Several Fed members also expressed concern that non-traditional financial institutions could increase problems for the US economy if higher interest rates expose them to more volatility.
The problems at cryptocurrency firm FTX emerged just as the Fed meeting took place.