Americans gear up for food, family and football on Thursday, but investors waited until Wednesday afternoon before they began to say thank you.
That’s because the Federal Reserve released minutes from its last meeting Wednesday at 2:00 p.m. ET, which provided further clues to the central bank’s deliberations on inflation and rate hikes.
At its Nov. 2 meeting, the Fed hiked rates by three-quarters of a percentage point — its fourth straight hike of this magnitude. But Fed Chair Jerome Powell hinted at a news conference that the Fed may soon start slowing the pace of rate hikes.
Minutes of that meeting showed that several other Fed policymakers agreed with Powell’s assessment.
“A number of participants noted that as monetary policy approaches a stance that is sufficiently restrictive to meet the committee’s targets, it would be appropriate to slow the pace of raising the target range for interest rates,” the Fed said in the log.
The Fed added that “a sizeable majority of participants believed that a slowdown in the pace of growth was likely to be appropriate soon.”
Stocks that were relatively flat and meandering before the minutes were released exploded after they were released. The Dow ended the day up more than 95 points, or 0.3%. The S&P 500 was up 0.6% and the Nasdaq was up 1%.
Other Fed members, most notably Vice Chairman Lael Brainard, had also hinted at a slower pace of rate hikes in recent speeches. Still, there were confusing signals from other Fed officials who continued to stress that inflation is not going away and needs to be brought under control.
To that end, the Fed said in the minutes that inflation remained “stubbornly high” and “more persistent than expected”.
With this in mind, traders are now pricing in a more than 75% chance that the Fed will hike rates by just half a point at its December 14th meeting, according to futures contracts on the CME. That’s a 52% increase for a half-point hike a month ago, but lower than an 85% chance for a half-point hike priced in just last week.
A number of recent inflation reports seem to indicate that the pace of runaway inflation is finally slowing to more manageable levels. The job market also remains relatively healthy, although the latest unemployment figures from a week ago rose.
But as long as the labor market remains stable and inflationary pressures continue to ease, the Fed is likely to scale back the extent of its rate hikes.
Some pundits are increasingly concerned that if the Fed goes too far on interest rates, the hikes will eventually slow the economy too much and potentially lead to much higher unemployment, job losses and even a recession.
The Fed’s rate hikes had a significant impact on the housing market, with rising mortgage rates helping to dampen home sales.
Still, confidence is growing on Wall Street that the Fed may be able to pull off a so-called soft landing. The Dow rose 14% in October, its best month since January 1976. The Dow rose another 4.5% in November and is down just 6% this year.
The S&P 500 and Nasdaq have also rebounded significantly since October, but both of these broader market indices remain lower than the Dow for the year.