Federal Reserve officials agreed at their gathering this month that they need to raise interest rates in half-point steps at their next two meetings, continuing an aggressive set of moves that would leave them with flexibility to shift gears later if needed.
While highlighting the “strong commitment and determination” of all policy makers to restore price stability, the minutes of the May 3-4 meeting, released Wednesday, showed officials attentive to financial conditions as they prepare to raise rates further.
In the weeks since the gathering, financial-market volatility has spiked as investors fret over the risk of a recession, though investors were cheered as they digested the less-hawkish-than-feared tone of the report.
The minutes indicate uncertainty over potential fault lines in financial markets as well as what level of rates would crimp demand, as officials battle the hottest price pressures in 40 years. References to possibly moving to restrictive policy also signal officials won’t stop until inflation is on a convincing path back to their 2% target. It’s a strategy that signals policy will be more data-dependent after Fed meetings in June and July.
It is not unreasonable to think the Fed is underlining that the path from September onwards is not set in stone. But we would be careful not to overdo this and read into the Fed language any kind of Bostic September pause-like signal.
Stocks rose after the minutes were published, while yields on Treasury notes fluctuated and the dollar pared gains. Markets continued to show traders pricing in 100 basis points of rate hikes over the next two meetings.
Most participants judged that 50 basis-point increases in the target range would likely be appropriate at the next couple of meetings. Many participants judged that expediting the removal of policy accommodation would leave the committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.
Fed officials noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook. They said that labor demand continued to outstrip available supply.
Officials also finalized plans to allow their $8.9 trillion balance sheet to begin shrinking, putting additional upward pressure on borrowing costs. Starting June 1, holdings of Treasuries will be allowed to decline by $30 billion a month, rising in increments to $60 billion a month in September, while mortgage-backed securities holdings will shrink by $17.5 billion a month, increasing to $35 billion.
The record also showed that the Fed staff revised up their inflation forecast. They estimated that the personal consumption expenditures price index would rise 4.3% in 2022 before decelerating to a 2.5% increase next year.
The Fed’s target for its preferred inflation gauge, the Commerce Department’s personal consumption expenditures price index, is 2% a year. The measure rose 6.6% for the 12 months ending March, while the Labor Department’s consumer price index rose 8.3% in April.