"Soon Slowing Down Is Appropriate" US Fed Also Mentions 'Recession' (Summary)

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] A majority of senior officials at the U.S. central bank, the Federal Reserve (Fed), agreed that the pace of interest rate hikes should soon be slowed. They judged that it is time to ease off the accelerator pedal, as excessive tightening could potentially trigger an unnecessary economic recession. For the first time since the Fed's rate hike cycle began in March, the possibility of a 'recession' next year was also mentioned.

◆ Fed Signals Pace Adjustment, Big Step Expected in December

According to the minutes of the November Federal Open Market Committee (FOMC) meeting released by the Fed on the 23rd (local time), a significant majority of attendees judged that "it will soon be appropriate to slow the pace of rate hikes." At the FOMC meeting held earlier this month, the Fed took a fourth consecutive giant step (a 0.75 percentage point rate hike), raising the upper bound of the benchmark interest rate to 4.0%, the highest level since 2008.

Attendees pointed out that inflation remains unacceptably high and that there is still a long way to go to reach the long-term target of 2%. However, they expressed concern that continuing the current high-intensity tightening could increase the risk of the financial system going off track. Some warned that considering the lag in policy effects, the rate hikes implemented so far this year may have already exceeded the level necessary for price stabilization.

The minutes stated, "Attendees saw the need to slow the pace of rate hikes to better assess how monetary tightening policies have affected the economy and price stability," and "considering the cumulative monetary policy, the lags before monetary policy takes effect, and economic and financial developments."

This is interpreted as a signal that the rate hike magnitude could be reduced to 0.5 percentage points starting from the December FOMC. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) rate futures market currently reflects over an 80% probability of a 0.5 percentage point rate hike in December. It is expected that rates will rise by 0.5 percentage points in February and 0.25 percentage points in March next year, reaching a terminal rate of around 5.0?5.25%.

However, a minority of attendees expressed concerns about slowing the pace of hikes. They argued that it is necessary to wait until there are clearer signs that inflationary pressures are easing and that rates have entered a more clearly restrictive territory. They noted "high uncertainty regarding the economic outlook and significant upside risks to inflation forecasts," also highlighting geopolitical risks such as the potential for energy prices to surge again.

Accordingly, the minutes also conveyed a clear message that easing the size of rate hikes does not mean the tightening is over. Attendees emphasized that "it will be appropriate to continue raising the target range for the federal funds rate." This aligns with Fed Chair Jerome Powell's remarks at the post-FOMC press conference, where he left room for pace adjustment while indicating that the terminal rate could rise to 5%.

The minutes suggesting a pace adjustment were interpreted as dovish, leading to a broad rally in the New York stock market. The Nasdaq index, which is sensitive to interest rates and tech stocks, closed at 11,285.32, up 0.99% from the previous session. Meanwhile, the dollar weakened. The Dollar Index, which measures the dollar's value against six major currencies, fell more than 1% to 106.12. Treasury yields also slipped.

◆ Recession Possibility Mentioned... Market Expects to Avoid Deep Downturn

Notably, the November minutes included the word 'recession' for the first time since the Fed began its rate hike cycle in March this year, drawing attention. According to the minutes, Fed economists mentioned that the probability of the economy entering a recession next year is close to the baseline. Bloomberg News reported that "the Fed views the probability of a recession next year at about 50%."

Attendees viewed "sluggish growth in real household spending, deteriorating global outlook, and tight financial conditions" as the most prominent downside risks. They also pointed out that "the need for greater financial tightening than previously estimated to achieve price stability is an additional downside risk." They further noted that the slowdown in the Chinese economy, the prolonged Russian invasion of Ukraine, global inflation, and simultaneous tightening by central banks worldwide could have ripple effects not only overseas but also on the U.S. economy.

Jeffrey Roach, Chief Economist at LPL Financial, said, "The minutes allow a reasonable inference that rates will be raised by 0.5 percentage points at the upcoming December meeting," adding, "While the risk of a recession next year appears increasingly likely, if the Fed responds accordingly, the recession could be short and shallow."

Some analysts also note that despite high inflation and aggressive tightening by major countries, the global economy has not slowed as much as initially feared this year. The Wall Street Journal (WSJ) reported that while key indicators in the U.S., European Union (EU), and others show signals of economic contraction below the baseline of 50, the impact remains limited. Therefore, even if a recession phase begins next year, it may be mild.

In the U.S., both the labor market and consumption remain robust, and growth is expected to continue through the end of this year. Europe is also assessed to have suffered less economic damage than initially feared from the energy crisis caused by Russia's invasion of Ukraine. Additionally, China is expected to play a role in driving global economic growth next year by easing COVID-19 restrictions.

However, risks of worsening economic conditions next year remain. The WSJ cited concerns including the slowdown in U.S. service and manufacturing activities, emerging market economic risks due to aggressive tightening in developed countries, and the resurgence of COVID-19 and uncertain economic reopening in China.

Douglas Leone, billionaire venture capitalist and partner at Sequoia Capital, attending a startup conference on the day, warned, "The current economic situation is more difficult and challenging than the 2008 financial crisis or the 2000 tech crisis (dot-com bubble)." He expressed concerns that "interest rates are rising globally, consumers are starting to run out of money, an energy crisis is occurring, and geopolitical issues persist." He also predicted that this recession could last until 2025 and that the value of technology companies is unlikely to recover at least until 2024.

This content was produced with the assistance of AI translation services.