Fed minutes indicate interest rate increases may slow soon

The Federal Reserve recently released the minutes from its November meeting, which showed that it will likely slow the pace of future interest rate increases as early as its upcoming December meeting. 

Slowing the pace will allow the committee to assess the impact of its rate increases on the economy and inflation, according to the minutes. And officials noted that in order to achieve the target inflation rate of 2%, it was more important to consider the level at which the Fed ultimately raised interest rates, rather than the pace of rate hikes.

"Several participants commented that continued rapid policy tightening increased the risk of instability or dislocations in the financial system," the minutes from the Federal Open Market Committee (FOMC) meeting stated. "There was wide agreement that heightened uncertainty regarding the outlooks for both inflation and real activity underscored 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."

At its early November meeting, the Fed raised interest rates by 75 basis points to a range of 3.75% to 4%, the highest level since January 2008. The Fed pledged to stay the course until it achieves its goal of lowering inflation to its 2% objective. 

Inflation, which hit 7.7% annually in October, a larger month-on-month decrease than anticipated and represents the fourth straight monthly decline, remained "higher and more persistent than anticipated," the FOMC minutes stated.

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Minutes reveal ‘challenges facing the FOMC'

The majority of the committee viewed a smaller but still substantial 50 basis point rate increase likely for the upcoming December meeting. The minutes noted that the smaller hikes would allow policymakers to evaluate the impact of the succession of rate hikes.  

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

However, some participants said that it could be better to wait before slowing the pace of policy rate increases "until the stance of policy was more clearly in restrictive territory and there were more concrete signs that inflation pressures were receding significantly," the minutes said.

"Minutes from the Fed's November meeting underscore the challenges facing the FOMC in properly calibrating monetary policy," John Leer, chief economist at decision intelligence company Morning Consult said. "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. 

"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," Leer continued. 

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Fed rate hikes could mean higher mortgage rates

Though the Fed is considering slowing the pace of interest rate hikes, it is still committed to bringing inflation to its 2% target rate. That means there are likely to be more interest rate increases ahead.

While mortgage rates aren't directly correlated to interest rates, they are influenced by the Fed's decisions.

After hitting a 20-year high of above 7%, mortgage rates dropped back down  recently to over 6%. Future rate hikes could mean that mortgage rates may rise again, according to Danielle Hale, chief economist at Realtor.com.   

"That risk goes up if next month's inflation reading comes in on the higher side," Hale said in a statement. 

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