Slower Interest Rate Hikes Will 'Likely Soon Be Appropriate': Fed Minutes

Inflation remains the central bank's top priority, according to the November meeting minutes released Wednesday by the Federal Open Market Committee.

What Investors Need To Know: The Fed's language on the economy was relatively bullish given recent elevated fears of a U.S. recession. The Fed reiterated its previous intentions to do whatever it takes to bring inflation down, but said it may soon begin to soften its tightening measures.

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

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The Fed also discussed the unintended consequences of tightening too aggressively.

“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."

In addition, FOMC members said "slowing the pace of increase could reduce the risk of instability in the financial system."

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Why It’s Important: The minutes come after the Federal Reserve this month issued its fourth 0.75% interest rate hike in five months. The bond market is pricing in a 75.8% chance of a 0.5% rate hike and a 24.2% chance of another 0.75% rate hike in December, according to CME Group.

The Federal Reserve has been under pressure all year to raise interest rates aggressively to combat inflation, but it must also attempt to avoid plunging the U.S. economy into a recession.

The Consumer Price Index (CPI) was up 7.7% in October and remains at multidecade highs despite the best efforts of the Fed.

In September, the Fed projected 0.2% U.S. GDP growth in 2022 and 1.2% growth in 2023. The Fed also projected 2022 PCE inflation of 5.4% and an unemployment rate of 3.8%. Twelve of the 19 FOMC members saw rates rising to a range of between 4.5% to 4.75% or higher in 2023.

The FOMC will update its economic projections next month at its December meeting.

Markets React: The SPDR S&P 500 ETF Trust SPY traded higher by 0.5% after the Fed minutes reassured investors the economy is on solid footing for now and the Fed is willing to act with additional aggressive rate hikes if needed.

The yield on 10-year U.S. Treasury bonds dropped slightly Wednesday to 3.741% after hitting multiyear highs above 4% in October.

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