- Fed minutes showed a majority of officials are in favour of easing the pace of interest rate rises.
- They flagged that rapid hikes increased the risk of instability in the financial system.
- The Fed has been lifting rates at a record pace to combat US inflation running at a 40-year high.
A majority of policymakers support slowing the pace of interest rate rises “soon,” minutes from the Federal Reserve’s November meeting showed.
“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” according to the minutes, adding that a slower pace would better allow the Fed to assess progress toward its goals of maximum employment and price stability.
“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 continued.
The Fed has been aggressively lifting interest rates to combat US inflation running at 40-year highs. It’s raised the benchmark interest rate by 75 basis points four consecutive times, lifting the fed funds rate from near zero to 4% as it aims to bring inflation down to its 2% target.
According to the minutes, some officials even warned that continued rapid monetary policy tightening increased the risk of instability or dislocations in the financial system.
But more important than easing the pace of interest rate hikes is the size needed to tame inflation, officials noted.
“With monetary policy approaching a sufficiently restrictive stance, participants emphasized that the level to which the Committee ultimately raised the target range for the federal funds rate, and the evolution of the policy stance thereafter, had become more important considerations for achieving the Committee’s goals than the pace of further increases in the target range,” the minutes said.
Meanwhile, others agreed that it may be better to wait until rates were well into restrictive territory, with more obvious signs that inflation pressures were easing significantly. October’s Consumer Price Index report showed inflation rose by 7.7%, below what economists had expected.
The discussion among officials has meant investors are expecting the Fed to raise by 50 basis points in December. That expectation has not convinced market commentators such as David Rosenberg that it’s yet time for a “celebration.”
“Everyone’s excited because the FOMC is going to slow the pace after a steady a diet of 75 beepers? So, going 50 basis points (and more!) into the most inverted yield curve since October 1981 is reason to be festive?” the leading economist tweeted on Wednesday.