By Yasin Ebrahim
Investing.com – A majority of Federal Reserve policymakers were in support of slowing the pace of interest rate hikes "soon" to assess the lagged impact of monetary policy tightening on the economy and inflation.
“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” the Fed's minutes showed. “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.”
At the conclusion of its previous meeting on Nov. 2, the Federal Open Market Committee raised its benchmark rate by 0.75 percentage points to a range of 3.75% to 4%.
It was the fourth-straight 0.75 percentage point rate hike in as many meetings, but the Fed also laid out the carpet for slowing the pace of rate hikes at upcoming meetings, flagging several factors ---- including the cumulative tightening of monetary policy, the lagged impact of monetary policy on the economy and inflation – that would determine the size of future hikes.
In the wake of recent data pointing to slowing but still above-trend inflation, several members have continued to echo market expectations for less hawkish rate hikes. There were some Fed members, however, who preferred to hold of slowing hikes until "the stance of policy was more clearly in restrictive territory and there were more concrete signs that inflation pressures were receding significantly," according to the statement.
About 80% of traders expect the Federal Reserve to slow the pace of rate hikes to 0.5% in December, according to Investing.com’s Fed Rate Monitor Tool.
With a slower pace of rate hikes largely priced in, investor attention has shifted to the terminal Fed Funds rate, or the level that rates will likely peak. The end game for rate hikes has also become an increasingly important factor for the Fed, though members acknowledged that while rates need to move higher than previously expected, there remains uncertainty around the terminal rate needed to achieve the central bank's objective.
"Participants commented that there was significant uncertainty about the ultimate level of the federal funds rate needed to achieve the Committee's goals and that their assessment of that level would depend," the minutes showed.
Traders are currently expecting rates to peak at 5.00% to 5.25%, though hawkish Fed members including St. Louis Fed President James Bullard recently suggested that rates may need to rise as high as 7% to bring down inflation.
Yet, even if rates do peak around 5% that would still be the highest rates seen since June 2006, and may prove painful for risk assets, with growth sectors of the market including tech particularly vulnerable.
“If they stop at 5% or 6% interest rates, that's pretty high, certainly compared with what we've seen over 10 to 20 years,” Managing Director of applied research at Qontigo Melissa Brown, told Investing.com's Yasin Ebrahim on Tuesday. For equities, the focus “will not be when they stop and stabilize, but really when they start to come down.”