Slower rate hikes looming as Fed mentions the 'recession' word
By Josh White
Date: Wednesday 23 Nov 2022
(Sharecast News) - Minutes from the Federal Open Market Committee's most recent meeting were met with some Thanksgiving cheer late on Wednesday, as most policymakers agreed that smaller interest rate hikes would "soon be appropriate".
The Dow Jones Industrial Average closed up 0.28% at 34,194.06 ahead of the holiday on Thursday, getting a small bump after the minutes were released late in the session.
At the conclusion of its last meeting on 1-2 November, the Fed made its third consecutive 75-basis point hike.
The central bank said in the minutes on Wednesday that it was still expecting interest rates to reach a higher place than previously thought, but slowing the pace of tightening was very much front-of-mind at the Fed meeting.
Slower rate hikes would give the Fed time to see how much of an effect 'lagging' was having on the American economy, given the effects of any monetary policy changes take time to filter through to inflation and economic activity.
"There wasn't a lot of new information in the minutes from the November meeting of the FOMC, as they appeared set to slow the pace of rate hikes soon," said Ryan Sweet, chief US economist at Oxford Economics.
"This mirrors the comments from Fed officials since the meeting and is consistent with our forecast for a 50-basis point rate hike in December.
"That said, 'various members' saw the fed funds rate peaking higher than previously thought, which isn't a glaring endorsement."
Sweet said Oxford would be adding a 25-basis point rate hike at the February meeting to its next baseline forecast as a result.
What was new, however, was the mention of possible recession, which the Federal Reserve said was possible in the next year.
Its previous minutes and reports had not mentioned the possibility of an economic recession in the US.
Ryan Sweet noted that the Fed still had a path towards a 'soft landing', including returning inflation to its 2% target and avoiding a recession, but he described it as an "extremely narrow" path.
"They assign a probability of a recession in the next year at 50%.
"Recall, the Fed's last summary of economic projections were not updated at the November meeting, showing an increase in the unemployment rate between the end of this year and next, something that hasn't occurred without the economy falling into recession."
Analysts at RaboResearch, meanwhile, said the minutes supported chair Jerome Powell's claim that that the ultimate rate level could be higher than previously expected, but also revealed that a number of participants were getting a "fear of heights".
However, regarding the December meeting, Rabo said a 50-basis point hike looked almost certain.
"In fact, it looks like forging a consensus about each next rate step may be easier than agreeing on the terminal rate," the analysts noted.
"The minutes support our forecast that the top of the target range will peak at 5.00% next year.
"However, while inflation may have peaked, we think its persistence poses an upside risk to our forecast.
"It is also why we do not expect the Fed to pivot before 2024."
Reporting by Josh White for Sharecast.com.
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