Fed officials anticipate slower interest rate hikes coming 'soon,' minutes show

Federal Reserve officials agreed at their November meeting that smaller interest rate hikes are appropriate in coming months as they weigh the impact that tighter monetary policy is having on the broader U.S. economy. 

Minutes from the U.S. central bank's Nov. 1-2 meeting released Wednesday show that policymakers anticipate downshifting the pace of rate increases soon, even though they see little signs of inflation abating. However, some committee members expressed concern about possible risks to the economy from higher rates and suggested a slower pace could allow them to assess progress on their goals. Others said they would like to wait before easing up on the pace of increases.

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"A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate," the minutes said. "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."

During the November meeting, the Fed's rate setting body raised the central bank's target rate by 75 basis points for the fourth consecutive time, following increases in June, July and September. The move also marked the sixth rate hike for 2022. A basis point is one hundredth of one percent.

Traders now expect the Fed to approve a 50 basis point rate increase in December. The CME FedWatch tool shows a 75% chance of a half point increase and approximately 25% chance of a three-quarters raise.

The Federal Open Market Committee meets Dec. 13 and 14.

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Markets rallied following the release of the Fed's November minutes, with the Dow Jones Industrial Average climbing 95 points. 

Ticker	Security	Last	Change	Change %
I:DJI	DOW JONES AVERAGES	37903.29	+87.37	+0.23%
I:COMP	NASDAQ COMPOSITE INDEX	15605.481263	-52.34	-0.33%
SP500	S&P 500	5018.39	-17.30	-0.34%

Still, despite investor hopes for a more dovish Fed in coming months, "various" officials concluded at the meeting that "the ultimate level of the federal funds rate that would be necessary to achieve the committee’s goals was somewhat higher than they had previously expected," the minutes said. 

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The Fed's efforts to cool the economy and wrestle inflation closer to its 2% target marks the most aggressive tightening campaign since the 1980s. But the efforts to combat inflation carry a potential risk of recession, and the U.S. central bank has drawn some criticism lately that it could be tightening too much. There is a growing fear that the Fed is working with backwards-looking data and that inflation has already started to cool as higher rates work their way through the economy. 

The uncertainty expressed by policymakers at the meeting underscores the challenges they face in calibrating monetary policy, according to John Leer, the chief economist at Morning Consult. 

"To put it bluntly, they don't know if, how and when their interest rate increases will start to affect the labor market, inflation and overall economic activity," Leer said. "This type of uncertainty increases the likelihood of continuing to raise rates until there's direct evidence of a slowdown in inflation and employment, which is likely to be too late to achieve a soft landing."

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At the November meeting, policymakers unanimously voted to approve to raise the federal funds rate by 75 basis points to a range of 3.75% to 4%, the highest since before the 2008 financial crisis. 

The rate hike put interest rates in firmly restrictive territory.