(Bloomberg) — 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, signaling they were leaning toward downshifting to a 50 basis-point hike in December.
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“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” according to minutes from their Nov. 1-2 gathering released Wednesday in Washington.
In addition, while Chair 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.
“There is more of an acceptance that we will need to slow the pace” of rate increases, said Lindsey Piegza, chief economist at Stifel, Nicolaus & Co., adding that downshifting to a half-point move “is the predominant lean of Fed officials.”
Investors expect the Fed to raise rates by 50 basis points when they meet Dec. 13-14 and see rates peaking around 5% by mid-2023. Powell has a chance to influence those expectations in a speech in Washington scheduled for Nov. 30.
At the meeting, officials raised the benchmark rate 75 basis points for a fourth straight time to 3.75% to 4%, extending the most aggressive tightening campaign since the 1980s to combat inflation at a 40-year high.
Officials discussed the effects of lags in monetary policy and the effects on the economy and inflation, and how soon cumulative tightening would begin to impact 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.
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“The FOMC 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
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“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.
Read more: Key Takeaways From Minutes of Fed’s November Meeting on Rates
Officials in September saw rates reaching 4.4% by the end of this year and 4.6% in 2023. They will update those quarterly forecasts at their Dec. 13-14 meeting.
Since the November gathering, economic data have shown modest growth with some signs of slowing inflation amid still strong demand for labor. Employers added 261,000 jobs last month and the unemployment rate rose slightly to 3.7%, 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.
–With assistance from Matthew Boesler and Chris Middleton.
(Updates with analyst reaction in sixth paragraph.)
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