WASHINGTON – Most Federal Reserve officials thought they should slow the pace of rate hikes after approving a 0.75 percentage point rate hike at their meeting earlier this month to address the high inflation to fight.
Their discussion at the meeting, described in minutes of the meeting released Wednesday, suggests they could switch to a 0.5 percentage point, or 50 basis point, rate hike at next month’s meeting.
Officials at their Nov. 1-2 meeting approved the fourth consecutive increase in supersize rates, bringing their benchmark rates to a range of 3.75% to 4%. They are raising interest rates at the fastest rate since the early 1980s in a bid to reduce inflation, which is at a near 40-year high.
All 19 officials at the meeting supported the decision to raise interest rates this month and broadly agreed they needed to raise them further, the minutes showed. Still, the discussion indicated that some were more concerned about the possibility of overdoing the increases, while others feared they might not be making enough progress to warrant a downshift.
Some in the first camp said risks were mounting that Fed rate hikes could eventually “go beyond what is needed to bring inflation back to its 2% target”. Some also warned that further hikes in interest rates in increments of 0.75 points “increase the risk of instability or dislocation in the financial system,” the minutes said.
A small minority believed it might be better to hold off on slowing hikes until rates are “more clearly in restrictive territory and there are more concrete signs that inflationary pressures are clearly easing,” the minutes read.
At their September meeting, most Fed officials forecast that they would raise benchmark federal funds to around 4.6% early next year.
Officials did not release any new rate forecasts when they met this month. Fed Chair Jerome Powell said at the Nov. 2 news briefing that they would have been higher had that been the case, given recent strength in the job market and high inflation readings.
The minutes said officials believed high inflation and a strong labor market would require an increase in the federal funds benchmark rate next year to levels “slightly higher than they had previously anticipated.”
The Fed is raising interest rates to fight inflation by slowing the economy through tighter financial conditions — like higher borrowing costs, lower stock prices, and a stronger dollar — which usually dampen demand.
Fed officials saw a US recession next year “almost as likely” as their baseline forecast of weak growth, the minutes showed. This meant a downgrade in the economic outlook due to tightening financing conditions this fall.
In recent public comment, officials have been broadly in favor of approving a 0.5-point hike at their December 13-14 meeting, acknowledging the risks of an unnecessarily deep downturn.
“A 50 basis point rate hike would still be significant,” Philadelphia Fed President Patrick Harker said in a speech earlier this month.
Fed Governor Christopher Waller said last week the central bank could still hike rates aggressively in the coming months, even if officials cut the size of their hikes to 0.5 points. He likened the Fed’s task to a pilot finding a comfortable cruising altitude after takeoff. “The higher the policy rate gets, the stronger the case for slowing the rate of increase while continuing to rise,” he said.
This summer and fall, several Fed officials suggested that they want to see evidence of inflation falling towards their 2% target before slowing or halting rate hikes. But at a Nov. 2 news conference, Mr. Powell suggested that a string of slower inflation readings had never been “the proper test” for slowing or halting rate hikes.
Instead, officials, including Mr. Powell, have shifted focus to how much interest rates may need to rise. According to CME Group, interest rate futures investors expect the Fed to hike interest rates to just over 5% by next March.
Consumer prices rose at a slower rate in October than in recent months, according to the Labor Department. Core prices, which exclude volatile food and energy items, have risen 0.3% since September, the smallest monthly gain in a year, and are up 6.3% year-on-year from 6.6%.
Some officials have indicated they see reasons for optimism about inflation as supply chain bottlenecks ease and prices of goods that have rallied over the last year are now falling.
But others are concerned, fearing that wage growth will remain at levels that would keep inflation above the Fed’s 2% target, even if price growth eases somewhat in the coming year.
“When I think about inflation today, we have sort of turned the tide on supply chain and manufacturing scarcity. Now we’re really looking at workers here as drivers,” Kansas City Fed Chair Esther George said in an interview last week.
Ms George said she was concerned about severe price pressures in labour-intensive service sectors, where prices tend to be more rigid, meaning they slow down very little or not at all outside of a recession.
Corrections & Enhancements
The next Fed monetary policy meeting will take place on December 13th and 14th. A previous version of this article incorrectly stated that it will take place from December 13th to 4th.
Authors: Nick Timiraos at firstname.lastname@example.org
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