Earlier this month, Federal Reserve officials stressed the need to raise interest rates quickly and probably more than markets expect to deal with the growing inflation problem, minutes of their meeting said Wednesday.
Not only did politicians see the need to increase the reference interest rate on loans by 50 points, but they also said that such increases are likely to be needed in the next few meetings.
They also noted that the policy may need to move from a “neutral” position, in which it is neither supportive nor limiting growth, an important consideration for central bankers that may resonate in the economy.
“Most participants thought that increasing the target range by 50 basis points would probably be appropriate for the next few meetings,” the minutes said. In addition, members of the Federal Open Market Committee said that “restrictive policies may be appropriate in the light of evolving economic prospects and risks to the prospects.”
The May 3-4 session saw that the FOMC set the interest rate increase by half a percentage point and set out a plan starting in June to reduce the central bank’s $ 9 trillion balance sheet, consisting mainly of government securities and mortgages. securities.
It was the biggest rate hike in 22 years, and came when the Fed was trying to cut inflation to a 40-year high.
Market pricing currently predicts that the Fed is moving towards an interest rate of around 2.5% -2.75% by the end of the year, which would be in line with where many central bankers are looking at a neutral interest rate. However, the statements in the minutes show that the commission is ready to go beyond that.
“All participants reaffirmed their strong commitment and determination to take the necessary measures to restore price stability,” the summary of the meeting said.
“To this end, participants agreed that the Committee should quickly move monetary policy to a neutral position, both by increasing the target range for federal funds interest rates and by reducing the size of the Federal Reserve’s balance sheet,” he said. . .
On the balance sheet, the plan will be to allow a limited level of revenue to decline each month, reaching $ 95 billion by August, including $ 60 billion for government bonds and $ 35 billion for mortgages. In addition, the protocol shows that it is possible to fully sell mortgage-backed securities with prior notice.
Minutes mention inflation 60 times, with members concerned about rising prices, even as the Fed’s policy and easing of several contributing factors, such as supply chain problems, combined with tighter monetary policy, help. for the situation. On the other hand, officials noted that the war in Ukraine and the Covid-related blockades in China will worsen inflation.
At a press conference after the meeting, Fed Chairman Jerome Powell took the unusual step of addressing the American public directly to underscore the central bank’s commitment to curbing inflation. Last week, Powell said in an interview with the Wall Street Journal that “clear and convincing evidence” would be needed that inflation was falling below the Fed’s 2% target before interest rates rose.
Along with their determination to reduce inflation came fears of financial stability.
Officials expressed concern that tighter policies could lead to instability in both the financial market and the commodities market. In particular, the protocol warns of “trading and risk management practices of some key players in commodity markets [that] were not fully visible to regulators. “
Risk management problems “can lead to significant liquidity requirements for large banks, broker-dealers and their clients”.
However, employees remained committed to raising interest rates and reducing the balance sheet. The minutes said that would leave the Fed “well-positioned later this year” to reassess the effect that policy has on inflation.
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