US Federal Reserve officials concluded earlier this month that the central bank should soon moderate the pace of interest-rate increases to mitigate risks of overtightening, signalling they were leaning towards downshifting to a 50 basis-point increase in December.
“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” according to minutes from their November 1-2 gathering released on Wednesday in Washington.
While Fed chairman Jerome Powell said during his post-meeting press conference that rates will probably ultimately go higher than officials’ September forecasts indicated, Wednesday’s report gave a more nuanced take: “various” officials — a descriptor not commonly used in the minutes — had 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 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 per cent to 4 per cent, extending the most aggressive tightening campaign since the 1980s to combat inflation at a 40-year high.
Ellen Meade, a former Fed Board economist 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 14 and see rates peaking around 5 per cent by mid-2023. Mr Powell has a chance to influence those expectations in a speech in Washington scheduled for November 30.
Strategically, Ms Meade expects Mr 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,” said Ms Meade, who is now a research professor at Duke University’s economics department. “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, and how soon cumulative tightening would begin to affect spending and hiring. A number of Fed officials said a slower pace of rate increases would allow the central bankers to judge progress on their goals.
“The FOMC [Federal Open Market Committee] 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,” Anna Wong, chief US economist at Bloomberg, said.
“The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important,” the minutes said.
The Fed said in its policy statement that rates would continue rising to a “sufficiently restrictive” level, while taking account of cumulative tightening and policy lags.
Officials in September saw rates reaching 4.4 per cent by the end of this year and 4.6 per cent in 2023. They will update those quarterly forecasts at their meeting in December.
Since the November gathering, economic data have shown modest growth with some signs of slowing inflation amid still strong demand for labour. Employers added 261,000 jobs last month and the unemployment rate rose slightly to 3.7 per cent, though it remains very low on a historic basis.
Financial conditions have also eased since the early November rate increase, with lower yields on government 10-year notes and higher US equity markets.
“The big picture remains in our view that the Fed intends to slow down in order to allow more time for lags to operate and cumulative tightening to date to show up in the data,” Evercore ISI’s head of central bank strategy Krishna Guha wrote in a note to clients.
“The hawkish talk from Mr Powell in the press conference and many Fed officials subsequently is intended to provide air cover for the slowing to take place without an excessive easing of financial conditions.”