Senior Federal Reserve officials expect smaller interest rate hikes “soon to be appropriate” as the threat of a recession grows.
Although the Fed still expects rates to rise more than previously forecast, senior officials are unsure how much further they will go. They say a slower rate hike would give them more time to assess the effects of the “lag” 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 Fed 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 strategic meeting in early November.
The bank’s previous minutes did not mention the possibility of a recession.
Major US stock gauges SPX,
increased gains after the release of the Fed minutes.
Last spring, the Fed quickly raised the key US interest rate to an all-time high of 4% from near zero in an effort to tame high inflation. Rising rates reduce inflation by slowing the economy and reducing 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 rates go too high.
Some members said there was a growing risk that the Fed’s actions would “go beyond what is needed” to bring inflation down to acceptable levels.
In recent speeches, several have suggested that a “pause” in rate hikes may be warranted early next year to see how it affects the economy. A quick easing of inflationary pressures could strengthen 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 its so-called interest 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.
In December, the Fed is likely to raise rates again, but markets are betting on a smaller 1/2 point increase. The record also suggests a smaller rate hike is likely.
“Without some wild inflation report before the next meeting, 50 bps sounds very reasonable in December,” said senior economist Jennifer Lee at BMO Capital Markets. “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 rates will go. Some want to stop at around 5%, while others suggest that maybe we should go higher.
Wall Street expects the Fed to raise its benchmark rate to 5% by next year.
The Fed’s aggressive stance stems from the biggest jump in prices since the early 1980s.
The Fed aims to bring inflation down to pre-pandemic levels of 2%, but they admit it could take some time.
Several Fed members also expressed concern that non-traditional financial institutions could exacerbate problems for the US economy if higher rates expose them to greater volatility.
The problems at the cryptocurrency company FTX appeared just as the Fed meeting took place.