Federal Reserve officials earlier this month emphasized the need to raise interest rates quickly, and possibly more than markets anticipated, to tackle rising inflation, minutes of the meeting released on Wednesday showed. Wednesday shows.
Policymakers not only see the need to raise the benchmark borrowing rate to 50 points, but they also say similar hikes are likely to be needed at some of their next meetings.
They further note that policy may have to shift to a “neutral” stance, where it does not support or constrain growth, an important consideration for central banks that can affect across the economy. economic.
“Most participants assessed that a 50 basis point increase in the target range would likely be appropriate over the next few meetings,” the minutes stated. Additionally, Federal Open Market Committee members pointed out that “a restrictive stance on policy may become appropriate depending on the evolving economic outlook and the risks to the outlook. “
The May 3-4 trading session saw the FOMC set rates through a half-percentage point cut and lay out a plan, starting in June, to reduce its balance sheet by $9 trillion. Central bank dollars consist mainly of Treasuries and mortgage-backed securities.
It was the biggest rate hike in 22 years and comes as the Fed tries to reduce inflation that is at a 40-year high.
Market valuations now suggest the Fed will move to a policy rate around 2.5%-2.75% by year-end, which would be consistent with where many central banks view a neutral rate. The statements in the minutes, however, suggest that the committee is ready to move beyond that.
“All delegates reaffirmed their strong commitment and determination to take the necessary measures to restore price stability,” the meeting summary stated.
To this end, delegates agreed that the Committee should rapidly shift the stance of monetary policy to neutral, through both increasing within the target range for the federal funds rate. state and reduce the size of the Federal Reserve’s balance sheet,” it continued.
On the balance sheet issue, the plan will allow for a cap on the amount of proceeds each month, which will hit $95 billion in August, including $60 billion in Treasury bills and $35 billion in grants. mortgage. Minutes also indicate that a sale of MBS is entirely possible, with advance notice that it will go well.
The minutes mentioned 60 times inflation, with members expressing concern about rising prices even amid confidence that Fed policy and the easing of a number of factors contributed, such as supply chain problems, combined with tighter monetary policy will help improve the situation. On the other hand, officials note that the war in Ukraine and the Covid-related shutdowns in China will exacerbate inflation.
At his post-meeting news conference, Fed Chairman Jerome Powell took the unusual step of speaking directly to the American public to emphasize the central bank’s commitment to curbing inflation. Last week, Powell said in a Wall Street Journal interview that it would take “clear and convincing evidence” that inflation is falling below the Fed’s 2% target before rate hikes will stop.
Along with their determination to reduce inflation are concerns about financial stability.
Officials expressed concern that tighter policy could destabilize both Treasurys and commodity markets. Specifically, the minutes warned about “trading activities and risk management of a number of key participants in the commodity market. [that] not fully seen by regulatory authorities. “
Risk management issues “can give rise to significant liquidity needs for major banks, brokers and their clients.”
However, officials remained committed to raising rates and reducing balance sheets. The minutes stated that doing so would leave the Fed “well positioned later this year” to reassess the impact of policy on inflation.
