Topline
The Federal Reserve indicated Wednesday it may soon ease up on its aggressive policy as higher interest rates start slowing the economy—signaling the worst of the central bank’s rate hikes could be over even as experts debate how successful they’ve been in taming the worst spike in prices since the 1980s.
The Fed has revealed “a substantial majority” of officials believe a slowing in the pace of rate … [+]
Key Facts
In a detailed summary of its early November meeting, the Fed revealed “a substantial majority” of officials believe a slowing in the pace of rate hikes will “likely soon be appropriate,” setting the stage for a widely expected half-point increase next month.
Though various officials said interest rates may need to be raised more than previously expected, they also acknowledged projections for economic growth have weakened in the past two months and that lowering the pace of hikes could reduce the risk financial instability.
The announcement comes as more data shows the economy has fallen into decline, with S&P Global on Wednesday reporting November has seen a “solid contraction in business activity” across the nation’s private sector—the second-worst decline since the early pandemic days.
According to S&P, many firms are blaming the “steeper declines” in business on the impact of inflation and higher interest rates, which have led to “greater hesitancy” among customers.
Fed officials have acknowledged their tightening will have economic consequences: On Wednesday, Kansas City Fed President Esther George told the Wall Street Journal that history has shown the current pace of tightening will have “painful outcomes” and that avoiding a recession may not be feasible.
Stocks ticked up after the report, with the tech-heavy Nasdaq climbing 1%, while the S&P 500 and Dow Jones Industrial Average jumped about 0.5% and 0.3%, respectively.
What To Watch For
The Fed’s next interest rate announcement is slated for December 14. Goldman forecasts a half-point hike next month, followed by three quarter-point hikes next year. That would push the top borrowing rate to 5.25%—the highest level since 2007.
Key Background
The latest inflation data showed consumer prices rose less than economists projected in October—fueling stock market optimism as Fed officials gauge when to hit the brakes on their aggressive tightening campaign. However, despite the one-month reprieve, many economists cautioned against being overly optimistic that inflation has subsided. “If this constitutes improvement, we’ve set a very low bar,” says Bankrate chief financial analyst Greg McBride, adding the “pervasiveness” of inflation “remains problematic,” particularly in shelter, food and energy prices. The S&P has soared 10% from an October low but is still down nearly 16% this year.
Further Reading
Fed Chair Jerome Powell—Haunted By The Ghost Of Paul Volcker—Could Tank The Economy (Forbes)
Fed Raises Interest Rates Another 75 Basis Points (Forbes)
Recession Fears Hit New High Even As Inflation Slows (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2022/11/23/fed-signals-rate-hikes-will-slow-soon-as-financial-instability-risks-rise/