All participants at the Federal Reserve’s May 3-4 policy meeting supported a half-percentage-point rate raise to curb inflation they admitted had become a major threat to the economy’s performance and was at risk of shooting higher without action by the U.S. central bank, minutes of the session showed on May 25.
This month’s 50-basis-point rise in the Fed’s benchmark overnight interest rate was the first of that size in over two decades, and “most participants” concluded that additional increases of that magnitude would “likely be appropriate” at the Fed’s policy meetings in June and July, according to the minutes.
The Minutes stated:
“All participants concurred that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high, with risks of even faster inflation “skewed to the upside” given current global supply problems, continued coronavirus lockdowns in China, and the Ukraine war.”
“In that context, participants agreed that the (Federal Open Market) Committee should expeditiously move the stance of monetary policy toward a neutral posture … They also noted that a restrictive stance of policy may well become appropriate.”
“Many participants” judged that getting rate hikes in the books now “would leave the Committee well-positioned later this year to assess the effects of policy firming.”
U.S. stocks climbed after the release of the report before backtracking. Futures traders decreased their rate-hike bets, but are still steadily pricing in half-percentage-point raises in June and July, with quarter-percentage-point increases over the three remaining meetings in 2022.
Bob Miller, head of Americas Fixed Income for investment giant BlackRock, said the minutes indicated that July would be a crucial defining point for the Fed. He wrote after the release of the minutes:
“With two extra half-percentage-point hikes strongly in view, the policy path after July will depend upon the trajectory of inflation and progress toward correcting the … imbalances in the labor market. If those factors are improving, then the Fed gains some breathing room” to shift to fewer rate increases, but otherwise might be forced to lean harder on the economy.”
The minutes showed the Fed struggling with how best to steer the economy towards lower inflation without triggering a recession or pushing the unemployment rate significantly higher – a task “several participants” at the meeting this month said would turn out difficult in the current environment.
By the Fed’s preferred measure, inflation has been running at more than three times the central bank’s 2% target.
“A number” of Fed participants, however, said data had started to signal that inflation “may no longer be worsening.” But even they admitted it was “too early to be confident that inflation had peaked.”
WIDE RANGE OF POSITIONS
The economy continued to be strong, the minutes noted, with households in such good shape that Fed officials said it might be tougher to make them stop spending and lift the pressure off of prices.
Supply constraints on businesses “were still significant,” the minutes stated, hiring remained challenging, and “the ability of firms to meet demand continued to be limited,” a recipe for continued price hikes.
With minimal certainty about when those conditions may subside, officials have started setting up a wide range of positions around what might occur after the future rate rises, from a complete pause in increasing borrowing costs this fall to requests for a hawkish series of half-percentage-point increases at the September, November and December meetings.
Inflation data has yet to show a compelling turn lower from the levels that have alarmed Fed officials and attracted comparisons with the inflation shocks of the 1970s and early 1980s.
Meanwhile, some analysts have voiced the risks of recession, and investors in contracts associated with the federal funds rate have recently reduced their estimates of how high-interest rates will increase.