Federal Reserve officials earlier this month stressed the need to raise interest rates faster and possibly higher than expected to tackle the market’s rising inflation problem, minutes of their meeting released Wednesday showed.
Policymakers not only saw the need for a 50-point hike in benchmark lending rates, but they also said a similar hike would be needed in the next several meetings.
He further said that the policy may have to move from a “neutral” stance in that it is neither conducive to nor restrictive of growth, an important consideration for central bankers that may resonate through the economy.
“The majority of participants decided that a 50 basis point increase in the target range would probably be appropriate over the next few meetings,” the minutes said. In addition, members of the Federal Open Market Committee indicated that “a restrictive stance of policy may be appropriate depending on the evolving economic outlook and the risks to the outlook.”
The rate-setting FOMC in the May 3-4 session approved a half percentage point increase and laid out a plan beginning in June to slash the central bank’s $9 trillion balance sheet, mostly Treasury and mortgage-backed. securities were included.
It was the biggest rate hike in 22 years and comes as the Fed is trying to pull inflation down to a 40-year high.
Market pricing currently sees the Fed moving to a policy rate of around 2.5%-2.75% through the end of the year, which would be in line with many central bankers’ view of the neutral rate. Statements in the minutes, however, indicate that the committee is ready to move on from there.
“All participants reaffirmed their strong commitment and determination to take the necessary measures to restore price stability,” the meeting summary said.
To this end, participants agreed that the Committee should increasingly shift monetary policy stance toward a neutral currency, increasing the target range for the federal funds rate and cutting the size of the Federal Reserve’s balance sheet. Through both,” it continued. ,
On the balance sheet issue, the plan would be to allow for a limited level of income each month, a number that would reach $95 billion by August, including $60 billion for treasuries and $35 billion for mortgages. Minutes further indicate that outright selling of mortgage-backed securities is already being reported.
Inflation was mentioned 60 times in the minutes, with members expressing concern about rising prices, even amid a belief that the Fed was easing policy and several contributing factors, such as supply chain problems, This coupled with a tighter monetary policy will help the situation. On the other hand, officials said that the war in Ukraine and the COVID-related lockdown in China will increase inflation.
In a news conference following their meeting, Fed Chairman Jerome Powell took the unusual step of addressing the American public directly to emphasize the central bank’s commitment to combating inflation. Last week, Powell said in a Wall Street Journal interview that it would take “clear and convincing evidence” that the inflation rate was approaching the Fed’s 2% target before rising.
Along with his resolve to reduce inflation came concerns about financial stability.
Officials expressed concern that the tough policy could lead to volatility in both Treasury and commodity markets. In particular, the minutes warned about the “trading and risk-management practices of some key participants in the commodities markets”. [that] were not fully visible to regulatory authorities.”
Risk management issues “can lead to significant liquidity demands for large banks, broker-dealers and their clients.”
Still, officials remain committed to raising rates and shrinking balance sheets. The minutes said doing so would leave the Fed “well positioned later this year” to reevaluate the impact policy on inflation.