US Federal Reserve officials said earlier this month that the US central bank should soon moderate the pace of interest rate increases to mitigate risks of overtightening, signaling they were leaning toward downshifting to a 50 basis-point hike next month.
“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” minutes from the Federal Open Market Committee’s (FOMC) Nov. 1 to 2 gathering released on Wednesday said.
While US Federal Reserve Chair Jerome Powell said that rates would probably ultimately go higher than officials’ September forecasts, Wednesday’s report gave a more nuanced take.
“Various” officials — a descriptor not commonly used in the minutes — concluded that rates would ultimately peak at a higher level than previously expected.
In another revelation, Fed staff told officials during the gathering that their assessment of the risks of a recession had grown to almost 50-50.
That was the first such warning since the central bank began raising rates in March.
US stocks and Treasuries rallied while the US dollar fell following the report, as investors took a dovish message from the minutes.
At the meeting, officials raised the benchmark rate 75 basis points for a fourth straight time to 3.75 percent to 4 percent, extending the most aggressive tightening campaign since the 1980s to combat inflation at a 40-year high.
Former US Federal Reserve Board of Governors economist Ellen Meade, who researched communication, said the word “various” is a rarely used term deployed when ambiguity is needed.
“If the minutes had said ‘several’ people thought the terminal rate would be higher — that’s not a strong message,” she said. “So they needed to fuzz it up.”
Investors expect the Fed to raise rates by 50 basis points when they meet on Dec. 13 and see rates peaking at about 5 percent by the middle of next year. Powell has a chance to influence those expectations in a speech in Washington scheduled for Wednesday next week.
Strategically, Meade expects Powell to continue to lean against easing financial conditions and somewhat resilient economic data.
“They have been expecting the economy to have slowed a bit. It has but not as much as they have been expecting,” Meade said. “They can’t stop the rate increases until they see some measured evidence that the economy is slowing.”
Officials discussed the effects of lags in monetary policy on the economy and inflation, and how soon cumulative tightening would begin to impact spending and hiring.
A number of Fed officials said a slower pace of rate increases would allow central bankers to judge progress on their goals.
“The FOMC minutes reveal a surprisingly strong dovish tendency on the committee as well as at the staff level. There is widespread agreement within the committee to slow the pace of rates hikes — a view championed by vice chairwoman Lael Brainard, in our view — but little conviction on how high rates should go.”
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