(Bloomberg) — Federal Reserve officials concluded earlier this month that the central bank should soon ease the pace of interest rate hikes to mitigate the risks of excessive tightening, signaling they were leaning toward a 50 basis point hike point in December.
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“A substantial majority of participants felt that a slowdown in the pace of growth is likely to be appropriate soon,” according to the minutes of their Nov. 1-2 meeting released Wednesday in Washington.
Also, while Chairman Jerome Powell said during his post-meeting press conference that rates would likely end up going higher than officials had forecast for September, Wednesday’s report offered a more nuanced view: “Various” officials – a descriptor not often used in minutes — concluded that rates will eventually peak at a higher level than previously expected.
In another revelation, Fed staff told officials at the meeting that their assessment of recession risks had risen to almost 50-50. It was the first such warning since the central bank began raising interest rates in March.
U.S. stocks and Treasuries rose while the dollar fell after the report as investors took a gloomy message from the minutes.
“There’s more acceptance that we’re going to have to slow the pace” of raising interest rates, said Lindsay Piega, chief economist at Stifel, Nicolaus & Co., adding that a move down to a half-point move “is the prevailing inclination of Fed officials .”
Investors expect the Fed to raise rates by 50 basis points when they meet on Dec. 13-14 and see rates peak around 5% by mid-2023. Powell has a chance to influence those expectations in a speech in Washington, scheduled for November 30.
At the meeting, officials raised the benchmark interest rate by 75 basis points for a fourth straight time to 3.75% to 4%, continuing the most aggressive tightening campaign since 1980 to fight inflation at a 40-year high.
Officials discussed the effects of the easing of monetary policy and the effects on the economy and inflation, and how soon the cumulative tightening will begin to affect spending and hiring. A number of Fed officials said the slower pace of rate hikes would allow central bankers to gauge progress on their targets.
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“The FOMC minutes reveal a surprisingly strong dovishness within the committee as well as at the staff level. There is broad agreement within the committee to slow the pace of rate hikes — a view supported by Vice Chairman Lael Brainard, we believe — but little conviction about how high rates should go.”
– Anna Wong, US Chief Economist
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“Uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited why such an assessment was important,” the minutes said.
The Federal Reserve said in its policy statement that interest rates will continue to rise to a “sufficiently restrictive” level, while taking into account the cumulative tightening and policy backlog.
Read more: Key takeaways from the Fed’s November rate meeting minutes
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.
After the November meeting, economic data showed modest growth with some signs of slowing inflation amid still strong labor demand. Employers added 261,000 jobs last month and the unemployment rate rose slightly to 3.7%, although it remains very low on a historical basis.
Financial conditions also eased after interest rate hikes in early November, with 10-year Treasury yields lower and US equity markets higher.
–With assistance from Matthew Boesler and Chris Middleton.
(Updates with analyst reaction in paragraph six.)
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