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Most senior officials at the Federal Reserve said 1/2-point increases in a key U.S. interest rate would “likely be appropriate at the next couple of meetings” as part of a two-pronged attack on high inflation.
After an expected series of rate hikes, minutes of the bank’s last strategy session in early May showed, Fed officials would reassess the economy to determine how much further they would go.
The main U.S. stock gauges
SPX,
COMP,
were recently trading mostly higher after the release of the Fed minutes.
To combat high inflation, the bank raised the short-term fed funds rate by 50 basis points after its May 3-4 meeting. It was the second rate hike this year. The Fed also unveiled plans to sell off its massive long-term bond holdings in another move to push interest rates higher
Higher rates tend to slow the economy and inflation.
Wall Street expects the Fed to raise its benchmark rate that it kept near zero during the pandemic to above 3% by year end, but the minutes offered little insight on where the bank would end up.
“Participants agreed that the [federal Open Market] Committee should expeditiously move the stance of monetary policy toward a neutral posturing, the minutes said.
Previously the Fed viewed a benchmark rate of around 2.5% as neutral, but some members have recently suggested it might be higher.
The Fed minutes did raise the possibility of even higher rates. “A restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
In Fed lingo, restrictive means interest rates are above what the central bank considers neutral.
At the same time, however, some Fed officials wondered if inflation may have already peaked based on the most recent information.
“A number of participants” suggested price pressures “may no longer be worsening.”
They acknowledged it was too early to be confident, however. The war in Ukraine and lockdowns in China could exacerbate inflation in the short run, they noted.
By quickly raising interest rates in the next few months, the Fed hopes to give itself some breathing room by the end of the year on what steps to take next.
An aggressive strategy would leave the Fed “well positioned later this year” to assess the effects of higher rates on the economy and to determine the extent of further increases.
Some analysts viewed the minutes as evidence the Fed planned to move less aggressively than Wall Street expects.
“We think the Fed is poised to raise the fed funds rate by 50 basis points at each of the June and July meetings and then scale back the pace of tightening to 25 basis point rate increases at the remaining meetings of the year,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
By and large, senior Fed officials expressed confidence in the U.S. economy. The took note of strong consumer spending and robust business investment and predicted the economy would grow “solidly” in the second quarter.
Some members worried that rising rates and the fight against inflation could harm the Fed’s ability to keep U.S. unemployment near historically low levels.
Still, the minutes showed that “all” Fed officials stressed their “strong commitment” to reduce inflation to previously low levels of 2% or less that prevailed in the decade before the pandemic.
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