Senior officials at the Federal Reserve expect smaller increases in interest rates “soon to be appropriate” as the threat of recession grows.
Although the Fed still expects rates to rise higher than previously predicted, senior officials are unsure how much further they will go. Slower rate hikes, they say, would give them more time to evaluate the “earnings” effects on the economy amid the growing threat of recession.
“Without a wild inflation report before the next meeting, 50 basis points in December looks very reasonable. But it is clear that the Fed is not done yet.”
The Fed’s economic staff said for the first time that a recession was possible next year, according to a detailed summary of the bank’s last strategy session in early November.
The bank’s minutes previously did not mention the possibility of a recession.
The main stock indicators are US SPX,
extended gains after release of nutritional minutes.
The Fed quickly raised the key US interest rate to the top 4% range from near zero last spring in an effort to tame high inflation. Rising rates tend to reduce inflation by slowing the economy and reducing demand for goods and labor.
But some economists and senior officials at the Fed also worry that the central bank could spark a recession or a period of prolonged economic weakness if rates go too high.
Some members said there was an increased risk that the Fed’s actions would “exceed what was needed” to reduce inflation to acceptable levels.
In recent speeches, some have suggested that a “pause” on rate hikes early next year may be necessary to see how they affect the economy. A rapid easing of inflationary pressures could strengthen their situation.
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 the so-called fed funds rate by three-quarters of a point to a range of 3.75% to 4% – the third major rate increase in a row. Most US loans such as mortgages and car loans are linked to the fed funds rate.
In December, the Fed is likely to raise rates again, but markets are betting on a smaller 1/2 point increase. The minutes also indicate that rate hikes are likely to be smaller.
“Barring some wild inflation reporting before the next meeting, 50 bps in December sounds very reasonable,” said senior economist Jennifer Lee of BMO Capital Markets. “But clearly the Fed is not done yet.”
Senior Fed officials have repeatedly said they plan to raise rates further in 2023 and then keep them high for an unspecified period of time to ensure that inflation declines.
Officials are less agreed on how high rates will go. Some want to stop at around 5% while others suggest they may have to 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 rise in prices since the early 1980s.
The Fed aims to reduce inflation to pre-pandemic levels of 2% or so, but they admit it could take some time.
Some Fed members also expressed concern that non-traditional financial institutions could increase the problems for the US economy if higher rates exposed them to greater instability.
The troubles at the crypto-currency firm FTX were emerging just as the Fed meeting took place.