The minutes from the FOMC meeting released on Wednesday showed that Federal Reserve officials agreed in November that they would need to soon slow down the pace of interest rate hikes as the treat of recession grows. While noting that inflation had still not shown significant signs of abating, a large majority of participants signalled that a slowing in the pace of increases would soon be appropriate.

Although the Fed still expects rates to rise higher than previously forecast, senior officials have issued somewhat varied opinions about the outlook for monetary policy, as they are unsure how much further rates need to increase to start to affect the labor market, inflation, and the overall economy. Slower rate hikes would give them more time to evaluate the lagging effects on the economy; however, this uncertainty cements the likelihood of further hikes until there is direct evidence of a slowdown in inflation and employment.

The minutes reaffirmed investors’ expectations that the Fed is likely to hike by 50 basis point at its December policy meeting and 25 basis point at the end of January. Fed officials for the first time said a recession was possible next year, according to the detailed summary of the bank’s last strategy session in early November.

A few officials suggested a “pause” in rate increases might be warranted in the first half of 2023 to see how the recent hikes affect the economy. A rapid easing of inflationary pressures could strengthen this possibility.

At this juncture a slower pace of rate hikes is largely priced in, and investors’ attention has shifted to the terminal funds rate. The terminal rate is also a very important factor for the central bank, though Fed officials acknowledged that there remains significant uncertainty about the ultimate level of the federal funds rate needed to achieve the Committee’s objectives.

The market is widely expecting rates to peak at 5.00% to 5.25% next year, which would be the highest level over the past 16 years. The Fed’s aggressive posture arises from the biggest surge in inflation since 1980s. The Fed has been aiming to bring down inflation around its target level of 2%, but they acknowledge it could take a while.

Also on Wednesday, the University of Michigan consumer sentiment index for November showed an improvement in the mood of consumers, while housing, manufacturing and services activity were weaker than expected. Several Fed members expressed worries that some institutions could amplify the problems for the U.S. economy if higher rates exposed them to greater instability.