"Various" Federal Reserve officials said the persistence of inflation meant that the federal funds rate may have to go higher than they previously expected to achieve the central bank's goal of bringing down inflation, according to the minutes of the Federal Open Market Committee's Nov. 1-2 meeting.
However, as the policy rate moved into restrictive territory, it would be appropriate to slow the pace of increases, the policymakers said. "A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate," the minutes said. "A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability."
A few of the officials said slowing the pace of increases would reduce the risk of financial system instability. Yet a few others said it would be better to wait until policy was "more clearly in restrictive territory and there were more concrete signs that inflation pressures were receding significantly."
At the time, the policymakers hiked the Fed's key rate by 75 basis points for the fourth straight time, bringing the federal funds rate target range to 3.75%-4.00%. At the press conference following the decision, Chair Jerome Powell said the central bank may move to smaller rate increases as soon as the December meeting.
After the minutes were released, the CME FedWatch tool's probability of a 50-bp hike at the Dec. 13-14 meeting increased to 80.6% from 75.8%. Equities moved higher, with the S&P 500 +0.6%, Nasdaq +1.0%, and the Dow +0.3%. Bonds also rose, pushing yield on the 10-year Treasury down 4 bps to 3.72%.
"The FOMC minutes confirmed that the Fed was likely to slow the pace of rate hikes. However, rates are heading higher than indicated at the September FOMC minutes, which may be a problem for the markets as they digest a higher terminal rate and the rising risk of a recession," said SA contributor Michael Kramer of Mott Capital Management.
During the September meeting, the central bankers agreed that the heightened uncertainty over the outlooks for inflation and real activity increased the importance of "taking into account the cumulative tightening of monetary policy, the lags with which monetary policy affected economic activity and inflation, and economic and financial developments," words that made their way into the Fed's monetary policy statement.
SA contributor Leo Nelissen commented: "The Fed minutes are a bit of a nothing burger. The market has already priced in smaller rate hikes until an expected terminal rate range of 5.00% - 5.25%. We also got another confirmation that the Fed isn’t ready to turn dovish just yet."
Inflation remained the primary focus on the meeting, as it was mentioned 95 times in the minutes, up slightly from the 89 mentions in the September meeting.
While the consumer price index rose less than expected in October, don't expect the Fed to declare victory over inflation yet. Headline inflation was still 7.7% Y/Y and core inflation +6.3% Y/Y, both significantly above the Fed's goal of 2%. Still, it gives the policymakers room to shift to smaller rate hikes.
The Fed "knows the fight against inflation isn’t over," SA contributor Nelissebn added. "After all, watching inflation rates slow due to tougher comparisons isn’t what this economy needs. The market isn’t out of the woods yet, as the Fed will need a good reason to stop hiking. That reason is likely more market and economic pain."
The Fed officials also discussed the disruptions of the gilt market in the U.K. and its potential implications for U.S. markets. Recall that the Bank of England stepped in to buy long-dated debt when the market froze up, essentially undoing some of its quantitative tightening. At the Fed meeting, "A few participants noted the importance of being prepared to address disruptions in U.S. core market functioning in ways that would not affect the stance of monetary policy, especially during episodes of monetary policy tightening."
Earlier this week, San Francisco Fed President Mary C. Daly said she expects the federal funds rate will have to go to "about 5%."