Fed Minutes Hint Future Rate Hikes Will Be Tied to Economic, Inflation Impact

The Fed’s September meeting minutes suggested “it would become appropriate at some point to slow the pace of policy rate increases while assessing the effects … on economic activity.”

The Federal Reserve is pursuing a rate hike path that, while likely costly for the U.S. economy, is nonetheless needed to tame the fastest inflation in decades, minutes from the central bank’s September policy meeting indicated Wednesday.

However, minutes of the September 21 policy decision suggested that Fed officials would be mindful of the impact of rate hikes on broader economic growth, with participants noting the need to ‘calibrate’ future rate hikes “with the aim of mitigating the risk of significant adverse effects on the economic outlook.”

“Participants observed that, as the stance of monetary policy tightened further, it would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” the minutes read. “Many participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the 2 percent objective.”

U.S. stocks were added modest gains following the release of the minutes at 2:00 pm Eastern time, with the Dow Jones Industrial Average up 131 points on the session and the S&P 500, which is riding a five-day losing streak, up 7 points.

Benchmark 10-year note yields eased lower, to 3.890%, while 2-year notes were pegged at 4.279%. The dollar index, which tracks the greenback against a basket of six global currencies, fell 0.15% to 113.150.

The CME Group’s FedWatch tool now suggests a 86% chance of another 75 basis point hike in November, which would be the fourth in succession, with bets on a smaller 50 basis point move in December holding at around 58%.

The Atlanta Fed’s GDPNow update, a real-time tracker of U.S. economic growth, sees the economy growing at a 2.9% clip, a figure boosted in part by last week’s stronger-than-expected September jobs report, which showed the headline unemployment rate falling to 3.5% amid the creation of 263,000 new jobs. 

Inflation, however, is still running uncomfortably hot for Fed policymakers, with core prices — as measured by the central bank’s preferred gauge for the month of August — rising 4.9% from last year, buttressed by robust gains for personal income and personal spending. 

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