Fed Minutes: May 2022 – Monetary Policy Could Enter Restrictive Territory
Earlier this month, Federal Reserve officials stressed the need to raise interest rates quickly and perhaps more than markets expect to tackle a burgeoning inflation problem, showed meeting minutes released on Wednesday.
Not only did policymakers see the need to raise benchmark borrowing rates by 50 basis points, but they also said similar hikes would likely be needed at future meetings.
They further noted that the policy may need to move beyond a “neutral” stance in which it is neither supportive nor restrictive of growth, an important consideration for central bankers that could spill over to the economy.
“Most participants felt that increases of 50 basis points in the target range would likely be appropriate at the next two meetings,” the minutes read. In addition, members of the Federal Open Market Committee advised that “a restrictive policy stance may well become appropriate depending on how the economic outlook changes and the risks to the outlook.”
The May 3-4 session saw the rate-setting FOMC approve a half-percentage-point hike and outline a plan, starting in June, to reduce the $9 trillion balance sheet of the central bank, consisting mainly of treasury bills and mortgage-backed securities.
It was the biggest rate increase in 22 years and came as the Fed tried to bring inflation down to its highest level in 40 years.
Market prices are currently seeing the Fed move to a key rate of around 2.5% to 2.75% by the end of the year, which would be consistent with the point where many central bankers are eyeing a rate neutral. However, statements in the minutes indicate that the committee is ready to go further.
“All participants reaffirmed their strong commitment and determination to take the necessary steps to restore price stability,” the summary of the meeting reads.
“To that end, participants agreed that the Committee should move the monetary policy stance quickly towards a neutral stance, both through increases in the target range for the federal funds rate and reductions in the size of the balance sheet of the Federal Reserve,” he continued. .
On the balance sheet issue, the plan will be to allow a capped level of revenue to roll in each month, a number that will reach $95 billion by August, including $60 billion from treasury bills and $35 billion for mortgages. The minutes further indicate that an outright sale of mortgage-backed securities is possible, provided that notice is given well in advance.
The minutes mentioned inflation 60 times, with members worrying about rising prices, even though they believed Fed policy and easing several contributing factors, such as supply chain issues. supply, combined with a tighter monetary policy would help the situation. On the other hand, officials noted that the war in Ukraine and Covid-related lockdowns in China would worsen inflation.
In his post-meeting press conference, Fed Chairman Jerome Powell took the unusual step of addressing the American public directly to stress the central bank’s commitment to controlling inflation. Last week, Powell said in an interview with the Wall Street Journal that it would take “clear and convincing evidence” that inflation was falling to the Fed’s 2% target before rate hikes stopped. .
Along with their determination to bring inflation down, concerns about financial stability have surfaced.
Officials expressed concern that a tighter policy could lead to instability in both the Treasury and the commodity market. Specifically, the minutes warned against “the trading and risk management practices of certain key players in the commodity markets [that] were not fully visible to regulators.”
Risk management issues “could result in significant liquidity demands for large banks, brokers and their customers.”
Still, officials remained committed to raising rates and shrinking the balance sheet. The minutes said that would leave the Fed “well positioned later this year” to reassess the policy’s effect on inflation.