At the Federal Reserve’s meeting earlier this month, a “significant majority” of decision-makers concurred. That it would “likely soon be appropriate” to halt the rate of interest rate increases as discussion over the effects of the U.S. central bank’s swift tightening of monetary policy grew.
The readout of the Nov. 1-2 meeting revealed officials were largely confident they could raise rates in smaller. More deliberate steps as the economy adapted to more expensive credit and worries about “overshooting” seemed to grow. The Fed increased its policy rate by three-quarters
of a basis points for the fourth consecutive meeting.
The Federal Open Market Committee (FOMC) minutes, which were made public on Wednesday. Stated that a slower pace “would better allow the (FOMC) to assess performance toward its goals of maximum job and price stability.“
“Among the reasons highlighted” were the “uncertain lags & magnitudes concerning the effect of monetary policy operations on growth and inflation.”
The minutes emphasised that a developing focus on exactly how high rates will need to rise to decrease inflation. And the need to calibrate it carefully in future months – was more significant than the size of upcoming rate rises.
Can Fed Actually Slow The Inflation?
Participants stressed that the level at. Which the Committee ultimately increased the target range and the evolution of the policy stance subsequently had become more relevant considerations than the pace, since monetary policy was approaching an sufficiently restrictive posture.
The direction of inflation in the upcoming months and whether recently lower-than-expected readings become such an established trend downward will be key factors in determining where policy will ultimately fall.
The staff economists at the Fed increased their forecasts for inflation in the “coming quarters” and added that the likelihood of a recession in the coming year was “nearly as likely” as the forecast for weak economic growth overall.
Investors continued to bet on a half-point hike at the policy meeting on December 13–14. According to contracts linked to the Fed’s policy rate.
The mere fact that they would be lowering the pace, according to Michael James. Managing director of stock trading at Wedbush Securities, “confirms what the majority of individuals have been wanting to see.“
Although policymakers admitted there had been little visible improvement on inflation & indicated rates still needed to climb.
The minutes also revealed an emerging disagreement within the Fed on the risks that swiftly tightening of policy could have to economic development and financial stability.
While “several participants” said that slower rate increases could cut financial system risks, “a few other participants” emphasised that any easing of the Fed’s policy tightening path should be postponed until there were “more tangible indicators that inflation pressures were retreating significantly.“
According to the Fed’s favoured metric, inflation is still running at a rate that is greater than three times its 2% target. Even if recent figures indicate inflation has peaked, the pressure on prices will gradually ease.
The battle between the “different” and the “several” will determine the future of monetary policy. According to Brian Jacobsen, senior investment strategist at Allspring Global Investments. Only a “variety” of officials believed they should increase their terminal rate estimates. While many believed moving forward increased the risk of financial instability.
Fed Monetary Policy
In its policy statement on November 2, the Fed hinted to growing worries about the risks of tightening monetary policy by stating that the “pace of future hikes” would “take into account the cumulative tightness of monetary policy. The delays with which monetary policy impacts economic activity & inflation, and economic and financial events.“
The minutes stated that “many participants commented that there was great uncertainty more about ultimate level of federal funds rate required to achieve the Committee’s goals.” A statement that suggested Fed officials were shifting their attention away from the magnitude of individual rate hikes in an effort to calibrate a stopping point.
The central bank will announce new policymaker predictions for the trajectory of interest rates, inflation. And unemployment during the meeting in December in addition to a policy statement.