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The Fed’s minutes reveal: interest rate hikes will probably moderate soon

Federal Reserve officials estimate that interest rate hikes will soon be smaller, in light of the impact the bank’s policy has on the economy – as indicated by the minutes of the Federal Reserve’s Open Market Committee meeting published this week (Wed). The summary of the meeting where the latest interest rate hike was decided indicates that smaller interest rate hikes are on the way. In general, the markets estimated that the upcoming increase in December is expected to be at a rate of 0.5%, after four consecutive increases of 0.75% each.

Although they hinted at smaller steps expected soon, according to the officials the signs of curbing inflation are still not significant. However, some committee members expressed concern about risks to the financial system if the Fed continued at the same aggressive pace. “A considerable majority of the participants believed that soon it would probably be right to slow down,” the minutes read. The summary noted that smaller increases would give policymakers an opportunity to withstand the impact of the sequence of increases.

Some of the participants stated that “slowing the rate of increases may reduce the risk of instability in the financial system”. Others said they would prefer to wait until the pace slows down. Senior officials stated that they see the balance of risks to the economy leaning to the negative side.

The participants of the meeting noted that it is important that the public also focus on the question of how far the Fed will go with the increases and “the evolution of the policy position afterwards became a more important consideration for achieving the committee’s goals than the rate of further increases in the target range”.

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The markets are trying to estimate not only the upcoming interest rate hike in December, but also how high the Fed interest rate will rise in the future. The markets expect several more increases in 2023 that will bring the interest rate to a level of about 5% and then perhaps several decreases before the end of next year. In recent days, senior officials have expressed a similar position regarding the need to continue the fight against inflation, while signaling the possibility of slowing the rate of increases, which hints at a reasonable possibility of a 0.5% increase in December but on an unknown path thereafter.

After four consecutive 0.7% hikes, the federal funds rate is in the 3.75%-4% range, the highest in 14 years. Although the inflation rate shows some encouraging signs, it remains much higher than the central bank’s official target of 2% and in October the consumer price index rose at an annual rate of 7.7%.

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