[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), has reached a consensus that it should soon reduce the pace of interest rate hikes while assessing the impact of monetary tightening on the economy.
According to the minutes of the November Federal Open Market Committee (FOMC) regular meeting released by the Fed on the 23rd (local time), a majority of meeting participants agreed that "it would be appropriate to slow the pace of increases soon." At the FOMC regular meeting held earlier this month, the Fed took four consecutive giant steps (0.75 percentage point hikes), raising the upper bound of the benchmark interest rate to 4.0%, the highest level since 2008.
Participants pointed out that inflation remains unacceptably high and that there is still a long way to go to reach the long-term target of 2%. However, they expressed concerns that continuing high-intensity tightening like the current one could increase risks to the financial system.
The minutes stated, "Participants viewed that a slower pace would allow better assessment of progress toward the goals of maximum employment and price stability," and "would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
The explanation is that the smaller the size of each rate hike, the more accurately policymakers can assess the effects of consecutive rate increases. This suggests that the rate hike size could be lowered to 0.5 percentage points as early as the December FOMC.
However, some participants also noted that it might be beneficial to wait until there are clearer signs of entering a more restrictive territory and a significant reduction in inflationary pressures. They said, "Uncertainty related to the economic outlook remains high, and upside risks to inflation forecasts are elevated," highlighting geopolitical risks that could cause energy prices to surge again. They also noted that although recent rent increases have slowed, it will take time for this trend to be reflected in the PCE indicator.
Accordingly, the minutes conveyed a clear message that easing the pace of rate hikes does not mean the end of tightening. The minutes stated, "Participants reaffirmed their strong commitment to returning inflation to the Committee’s 2% goal," and "continued to expect that ongoing increases in the target range for the federal funds rate would be appropriate." They agreed that there is considerable uncertainty about the terminal rate level and emphasized that "it will depend on the data." This aligns with Fed Chair Jerome Powell’s remarks at the press conference immediately after the FOMC, where he left room for slowing the pace but suggested that the terminal rate could be higher.
The minutes also mentioned, "Participants are prepared to adjust the stance of monetary policy appropriately if risks emerge that could impede the achievement of the goals," and "their assessments will include information on public health, the labor market, inflation pressures and inflation expectations, and finance." Additionally, they pointed out that the slowdown in the Chinese economy, the prolonged Russian invasion of Ukraine, global inflation, and simultaneous tightening by central banks worldwide could affect overseas economic activities and potentially have spillover effects on the U.S. economy.
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