When will the Fed pivot on its interest rate hikes?

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Most Federal Reserve officials at their last meeting favored reducing the size of their interest rate hikes “soon,” just before raising its benchmark rate by a substantial three-quarters of a point for the fourth time in a row.

Central bank policymakers saw “very little sign that inflationary pressures were easing.” Still, a “substantial majority” of officials felt that smaller rate increases would “probably soon be appropriate,” according to the minutes of your meeting on November 1 and 2 released on Wednesday.

The Fed is widely expected to raise its key short-term rate, which affects many consumer and commercial loans, by half a point when it meets in mid-December.

“Slowing down would give the (Fed) the ability to assess the economic outlook and see where they are,” Jennifer Lee, a senior economist at BMO Capital Markets, wrote in a research report. “Short of a wild inflation report before the next meeting, (a half percentage point increase) sounds very reasonable in December. But the Fed is clearly not done yet.”

The increase in wages, the result of a strong job marketcombined with weak productivity growth, they were “inconsistent” with the Fed’s ability to meet its 2% annual inflation target, policymakers concluded, according to the minutes.

At that meeting, Fed officials also expressed uncertainty about how long it might take for their rate hikes to slow the economy enough to control inflation. Chairman Jerome Powell emphasized in a post-meeting news conference that the Fed has not even come close to declaring victory in its fight to curb high inflation.

Still, some of the policymakers expressed the hope that falling commodity prices and the removal of supply chain bottlenecks “should contribute to lower inflation in the medium term.” Indeed, the government reported earlier this month that price increases moderated in October in a sign that inflationary pressures may be starting to ease. Consumer inflation reached 7.7% compared to the previous year and 0.4% from September. The year-over-year increase, while painfully high by any measure, was the smallest increase since January.

Wednesday’s minutes revealed that Fed officials thought continued rate hikes would be “essential” to prevent Americans from waiting for inflation to continue indefinitely. When people expect higher inflation, they act in ways that can make those expectations come true by themselves, for example by demanding higher wages and spending vigorously before prices can accelerate further.

Fed officials noted that most employers resisted layoffs even as the economy slowed, apparently “eager” to retain workers after a year and a half of severe labor shortages. The United States the unemployment rate is 3.7%just above a half-century low.

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