Fed Minutes: May 2022 – Monetary policy may move into restricted territory
Federal Reserve officials earlier this month stressed the need to raise interest rates quickly and possibly more than markets expect to tackle the mounting inflation problem, minutes from the meeting released on Wednesday showed.
Policy makers not only saw the need to raise benchmark borrowing rates by 50 points, but also said similar increases would likely be necessary in the next several meetings.
They further noted that policy may have to move beyond a “neutral” position in which it is neither supportive nor restrictive of growth, an important consideration for central bankers that could reverberate through the economy.
“Most participants considered that a 50 basis point increase in the target range would likely be appropriate in the next two meetings,” the minutes said. Additionally, FOMC members noted that “a restrictive policy stance may become appropriate depending on the evolving economic outlook and risks to the outlook.”
The May 3-4 session saw the Federal Open Market Committee (FOMC) agree to raise the interest rate by half a percentage point and put in place a plan, starting in June, to reduce the central bank’s $9 trillion balance sheet consisting mostly of Treasury bills and mortgage-backed securities. real estate.
It was the largest interest rate increase in 22 years and came as the Federal Reserve tries to bring inflation down to a 40-year high.
Market rates are currently seeing the Fed move to a policy rate of between 2.5% and 2.75% by the end of the year, which would be consistent with where many central bankers see a neutral rate. However, the data in the minutes indicate that the commission is ready to go further.
The meeting summary stated that “all participants affirmed their strong commitment and determination to take the necessary measures to restore price stability.”
To this end, participants agreed that the Committee should rapidly move the monetary policy stance toward a neutral stance, through both increases in the target range for the federal funds rate and reductions in the size of the Federal Reserve’s balance sheet. .
On the balance sheet issue, the plan will be to allow a set level of revenue to be rolled over each month, a figure that will reach $95 billion by August, including $60 billion from Treasury and $35 billion in mortgages. The minutes further indicate the possibility of outright sale of mortgage-backed securities, with advance notice of this happening.
The minutes cited inflation 60 times, with members expressing concern about price hikes even amid confidence that Fed policy and the easing of many contributing factors, such as supply chain problems, along with tighter monetary policy would help the situation. On the other hand, officials have indicated that the war in Ukraine and Covid-related lockdowns in China will exacerbate inflation.
In his post-meeting press conference, Federal Reserve Chairman Jerome Powell took the unusual step of addressing the American public directly to underscore the central bank’s commitment to taming inflation. Last week, Powell said in an interview with the Wall Street Journal that it takes “clear and compelling evidence” that inflation is falling to the Fed’s 2% target before rate increases stop.
Alongside their determination to bring down inflation came concerns about financial stability.
Officials expressed concern that tightening the policy could cause instability in both the treasury and the commodity market. Specifically, the minutes warned about the “trading and risk management practices of certain key participants in the commodity markets.” [that] It was not fully visible to the regulatory authorities.”
Risk management issues “can lead to significant liquidity demands for large banks, brokers, dealers and their clients.”
However, officials remained committed to raising interest rates and lowering the balance sheet. The minutes stated that doing so would leave the Fed “in a good position later this year” to reassess the impact of policy on inflation.