By Yasin Ebrahim

Investing.com — Federal Reserve policymakers agreed that the central bank should move “expeditiously” on rate hikes to rein in inflation, but downplayed the odds of a recession pointing to a strong labor market, the minutes of the Fed’s May 3-4 meeting showed Wednesday. 

“[P]”Articipants deemed it necessary to swiftly move to a more neutral monetary policy stance,” according to the minutes. 

It concluded the May previous meeting. 4, the Federal Open Market Committee raised its benchmark rate in a range of 0.75% to 1%. It was the Fed’s largest rate hike since 2000.

Jerome Powell, Fed chairman, indicated that additional 50 basis points rate increases would be necessary to reduce economic growth and lower inflation in the wake of the Fed’s monetary policy statement. 

“[T]here is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings,” Powell said at the press conference on May 4.

Fed Chief Powell also dispelled fears that central bank officials were planning on increasing rates during upcoming meetings. “Seventy-five basis points is not something the committee is actively considering,” Powell said.

Market participants are now pricing in the likelihood that the Fed may suspend its rate increase cycle for later this year in order to evaluate the progress against inflation. 

“I have got a baseline view where for me I think a pause in September might make sense,” Bostic told reporters Monday following a speech to the Rotary Club of Atlanta.

All data point to a Fed less aggressive. The trend in inflation expectations has been lower and tightening financial circumstances are driving demand for key economic sectors, including manufacturing and housing.  

The 10-year inflation breakeven — a key measure of inflation expectations over the next decade – fell to 2.6% earlier this week, still above the Fed’s 2% target but down from more than 3% seen in late February 

Against the less hawkish narrative emanating from Fed members, market participants are reassessing their bets on the terminal fed funds rate, or the peak Fed’s funds rate. 

“The idea of 75bp hikes seems to be waning and we are hearing a little less about the Fed terminal rate in the 3%+ area,” ING said in a note earlier this week. 

Treasury yields have reacted in kind and lost their recent gains. The 10-year Treasury yields are now down further than 3%.   

The Fed’s quantitative tightening program — which involves trimming the Fed’s nearly $9 trillion-worth of balance sheets — will continue to tighten financial conditions.

On June 1, the Fed will begin reducing its balance sheets at $47.5 billion per monthly.  

In the initial phase of the plan, $30 billion would be allowed in Treasury securities, $17.5 billion in agency MBS and $15 billion to help the Fed roll-off its balance sheet. The Fed will gradually ramp up this pace over three months, to $60 billion per month and $35 billion respectively.