Moneycontrol Pro Panorama | Future rate hikes to be smaller but FOMC minutes show no sign of pivot yet

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After four straight hikes of 75 basis points each, majority of members of the US Federal Open Market Committee seem ready to slow the pace of rate increases. That's the key takeaway from the minutes of the last FOMC meeting.

That isn't quite the pivot which some in the market are hoping for — the panel will just increase rates in smaller increments as the fight to vanquish inflation isn't quite over yet. Moreover, the terminal rate, or the peak rate at which the tightening will stop, is expected to go higher than expected previously — 5 percent as per some statements of FOMC members compared to 4.6 percent earlier.

The danger is that monetary policy transmission happens with a lag and some members have pointed out that monetary tightening could exceed what's required to bring inflation under control.

“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress towards its goals of maximum employment and price stability,” the minutes said. “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 the near term, it means that the next rate hike would likely be 50 basis points instead of 75 basis points. Rate hikes will continue because the minutes noted that inflation remains “stubbornly high”.

Nevertheless, the slowing of the pace of rate hikes tuned the mood of the markets sunny. US treasury yields slipped, US equities climbed and this optimism was visible in the Indian markets today as well.

Thoughts of a recession seem to have been banished for now although the minutes said the chances of the US economy slipping into a recession sometime next year is 50 percent.

In a piece for Moneycontrol today, Emkay’s Madhavi Arora argues that inflation has structurally changed and a recession is now necessary to pull it back to policy targets. She also explains how it will affect your investment decisions. Read the piece here.
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​Moneycontrol Pro