The Fed's aware it risks hiking interest rates too fast – so there's less need to worry about a recession, Goldman Sachs says

The Federal Reserve could slow the pace of its rate-hiking campaign as it approaches its 4.75% target, Jerome Powell said Wednesday.

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• Federal Reserve Chair Jerome Powell acknowledged the risks of hiking rates too fast on Wednesday.
• That makes it less likely the US will be tipped into recession by its tightening, Goldman Sachs said.
• "We now see the odds of miscalibrating as a bit lower," the Wall Street bank's strategists said.

Investors should fret less about a potential US recession after the Federal Reserve's latest meeting, Goldman Sachs strategists believe.

The US central bank hiked interest rates by an outsized 75 basis points for a fourth time in a row on Wednesday, but chair Jerome Powell appeared to signal its policymakers could start cooling down its aggressive rate-hike campaign in December.

Goldman Sachs said the Fed now looks likely to raise interest rates for longer, but at a slower pace, meaning its policy moves will be less likely to trigger a slowdown in economic growth.

"Today's meeting made us a bit less concerned about the risk that the Fed will unnecessarily overtighten enough to cause a recession next year, despite the hint at a higher peak funds rate," the Wall Street bank's team of economists said in a research note Wednesday.

The Fed has been raising interest rates rapidly in a bid to tame rising prices, and faces the tricky task of not crushing economic growth at the same time.

But inflation has remained stubbornly close to its 40-year high, buoyed by sustained rises in prices for services like transportation and healthcare. The headline rate grew 8.2% year-on-year in September.

Powell's comments after the rate decision announcement suggests the Fed will now focus more on the factors driving inflation rather than cherry-picking soaring prices in particular sectors, the Goldman team said.

"We now see the odds of miscalibrating as a bit lower," the team led by chief economist Jan Hatzius said.

"The Federal Open Market Committee is likely to move less quickly and appears less likely to overtighten in a scenario where the underlying causes of the inflation problem are being resolved but services inflation lags behind and remains uncomfortably high for a while," they added.

Powell acknowledged the pace of rate hikes could start slowing as soon as December in a bid to tighten more precisely as the Fed nears its 4.75% interest rate target.

"It will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal," the Fed chair said. 

"So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made," he added.

Read more: The Fed says it could cool it on rate hikes as soon as next month. Now the future of the economy depends on how long the increases last.

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