A “substantial majority” of Federal Reserve officials support slowing down the pace of interest rate rises soon, even as some warned that monetary policy would need to be tightened more than expected next year, according to an account of their most recent meeting.
Minutes from the November meeting, at which the Fed raised its benchmark rate by 0.75 percentage points for the fourth time in a row, suggested officials are committed to ploughing ahead with their campaign to stamp out elevated inflation.
However, the account also signalled that officials are prepared to start raising rates in smaller increments while they assess the economic effect of the most aggressive tightening campaign in decades.
“A slower pace in these circumstances would better allow the committee to assess progress toward its goals of maximum employment and price stability,” according to the minutes.
The account, released on Wednesday, showed some Fed officials believe they will have to squeeze the economy more than they initially expected because inflation had shown “little sign thus far of abating” – even if they get there with smaller rate rises.
A few also argued it could be “advantageous” to wait to slow the pace of rate rises until the policy rate was “more clearly in restrictive territory” and that there were clearer signals inflation was slowing.
However, in a sign of divisions among policymakers, others warned there was a risk that the cumulative effect of rate rises could “exceed what was required” to bring inflation under control.
US stocks extended gains following the release of the minutes. The S&P 500 was up 0.5 per cent in midafternoon trading in New York, while the Nasdaq Composite, stacked with technology companies more sensitive to changes in interest rate expectations, gained 1 per cent.
"We have a fundamental misunderstanding of our housing need."
In government bond markets, the yield on the 10-year US Treasury note, seen as a proxy for global borrowing costs, slipped 0.05 percentage points to 3.71 per cent. The policy-sensitive two year yield fell 0.04 percentage points to 4.48 per cent. Both yields, which move inversely to the debt instruments’ prices, had been broadly flat in the lead-up to the publication of the minutes.
Following the most recent rate decision, the federal funds rate now hovers between 3.75 per cent and 4 per cent, a level that top officials say will begin to more directly curb demand and damp consumer spending.
Because rate rises take time to feed through to the economy, Fed policymakers have proposed “downshifting” to half-point rate rises as soon as the next meeting in December, when their campaign to tighten monetary policy will enter a new phase.
According to the minutes, officials engaged in a long debate about the delayed effects of tighter monetary policy. They noted that interest rate-sensitive sectors such as housing had adjusted quickly, but that the “timing of the effects on overall economic activity, the labour market, and inflation was still quite uncertain”.
At a press conference earlier this month, chair Jay Powell said the level at which the fed funds rate tops out will surpass the 4.6 per cent level expected by most Fed officials just a couple of months ago.
His warning of a higher “terminal rate” came amid mounting evidence that price pressures are becoming embedded in a broader range of goods and services even as the pace of consumer price growth eases.
Many policymakers have since said that the fed funds rate will need to rise above 5 per cent at least in order to bring inflation back to the Fed’s 2 per cent target.
They have also pledged to keep interest rates at a level they consider “sufficiently restrictive” for an extended period until they are confident the economy is starting to cool down as hoped.
According to the minutes, economists at the Fed judged the possibility of a recession over the next year was “almost as likely” as their baseline prediction that the world’s largest economy will narrowly avoid one.
The minutes also indicated heightened concern about financial stability risks associated with the Fed’s plans to rapidly increase borrowing costs, citing recent ructions in UK government bond markets that forced the Bank of England to step in.
However, investors continue to be sceptical about the Fed’s commitment to pressing ahead with monetary tightening, especially as economic data becomes increasingly mixed.
Despite protestations from Fed officials, market participants expect the US economy to tip into a recession next year, forcing the central bank to slash interest rates. – Copyright The Financial Times Limited 2022