Fed eyes slower rate hikes as recession threat grows

Top Federal Reserve officials expect a smaller interest rate hike “soon to be appropriate” as the threat of a recession grows.

While the Fed still expects rates to rise higher than previously forecast, top officials are unsure how much further they will go. They say a slower rate hike would give them more time to assess the “lagged” impact on the economy amid the growing threat of a recession.

“So, absent some wild inflation report before the next meeting, 50 basis points in December sounds very reasonable. But the Fed is clearly not done yet.

According to a detailed summary of the bank’s last strategy session in early November, Fed economists said for the first time that a recession is likely next year.

The bank’s previous protocols did not mention the possibility of a recession.

Major US stock gauges SPX,
+0.60%

DJIA,
+0.55%
increased gains after the publication of Fed minutes.

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The Fed has quickly raised the key US interest rate to the high end of the 4% range from near zero last spring in an effort to rein in high inflation. Rising rates tend to reduce inflation, slowing the economy and depressing demand for goods and labor.

However, some economists and top Fed officials also worry that the central bank could trigger a recession, or a period of prolonged economic weakness, if rates get too high.

Some members said there was a growing risk that the Fed’s actions would “go beyond what is necessary” to bring inflation down to acceptable levels.

In recent speeches, some have suggested a “pause” in rate hikes until early next year to see how they affect the economy. A sharp easing of inflationary pressures could strengthen their position.

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Inflation rose sharply earlier this year to a 40-year high of 9.1% from near zero in the early stages of the pandemic. It has since slowed to 7.7%.

Earlier this month, the bank raised the so-called federal funds rate by three quarters to a range of 3.75% to 4%, the third big rate hike in a row. Most of the U..S. loans such as mortgages and auto loans are tied to the federal funds rate.

The Fed is likely to raise rates again in December, but markets are betting on a smaller 1/2 point increase. The minutes also suggest a smaller rate hike is possible.

“So when inflation is reported before the next meeting, 50 bps sounds very reasonable for December,” said Jennifer Lee, senior economist at BMO Capital Markets. “But the Fed is clearly not done yet.”

Top Fed officials have repeatedly said they plan to continue raising rates in 2023 and then keep them high indefinitely to keep inflation under control.

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Officials are less unanimous on how high the rates will be. Some want to stop at around 5%, while others suggest they may need to go higher.

Wall Street expects the Fed to raise its benchmark rate to 5% by next year.

The Fed’s aggressive stance follows the biggest rise in prices since the early 1980s.

The Fed’s goal is to bring inflation down to around 2% before the pandemic, but they admit that could take some time.

Several Fed members also expressed concern that non-traditional financial institutions could exacerbate the US economy’s woes if higher rates expose them to greater volatility.

Trouble at cryptocurrency firm FTX emerged just as the Fed was meeting.

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