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Fed minutes: May 2022 – Monetary policy may move into restrictive territory


Federal Reserve officials stressed earlier in the month that they needed to increase interest rates rapidly and perhaps more quickly than market expectations to address a growing inflation problem. Meeting minutes were released Wednesday. 

The need to hike benchmark borrowing rates by 50% was recognized by policymakers. They also indicated the possibility of similar rises at subsequent meetings. 

Additionally, they noted that the policy should be more than a neutral position that does not support nor restrict growth. It is an important point for central bankers to consider as it could echo throughout the economy.

The minutes noted that “most participants believed that 50 basis points increases in the target range would be likely to be appropriate at these next two meetings.” Federal Open Market Committee members also indicated that a more restrictive policy stance may be appropriate, depending on economic conditions and risks.

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In its May 3–4 meeting, the FOMC, rate-setting body, approved the half percent point increase and set out a plan for reducing central bank’s $9 billion balance consisting mainly of Treasurys, mortgage-backed securities, and starting in June.

This was the Fed’s largest rate hike in 22 years, and it came at a time when inflation is running at an all-time high of 40 percent.

The Fed currently has a market price of about 2.5%-2.75% for its policy rate by year’s end. This is consistent with the neutral rate that central bankers consider to be. The minutes contain statements that indicate the committee’s willingness to move beyond the 2.5%-2.75% mark.

According to the summary of the meeting, “All participants confirmed their firm commitment and determination in taking the steps necessary to restore prices stability.”

Participants agreed to this effect that the Committee should quickly move monetary policy into a neutral position through increases in federal funds rates and reductions in Federal Reserve balance sheets.

Concerning the balance sheet, it is planned to permit a cap on the monthly proceeds. It will amount to $95 Billion, which includes $60 billion Treasurys and $35B for mortgages. Further, the minutes indicate that MBS may be outright sold. This is a possibility that was communicated well in advance.

Minutes mentioned inflation sixty times. Members expressed concern over rising prices despite the fact that they believed Fed policy, the loosening of several contributor factors such as supply chain problems and tighter monetary policies, would improve the situation. Officials noted, however that inflation would be exacerbated by the conflict in Ukraine and Covid-associated lockdowns to China.

Fed Chairman Jerome Powell addressed the American people directly after his news conference to emphasize the central bank’s determination to control inflation. Powell told the Wall Street Journal last week in an interview that it would need “clear, convincing evidence” that inflation has fallen below the Fed’s 2% target to stop rate rises.

They also had concerns regarding financial stability as part of their determination to lower inflation.

Officials were concerned that tighter policies could lead to instability in the Treasury as well as the commodities market. Minutes specifically warned about the “trading and risk management practices of key players in commodity markets.” [that]They were not immediately visible to the regulatory authorities.”

“Risk-management concerns could lead to substantial liquidity requirements for large banks, brokers-dealers and clients.”

Officials remained determined to raise rates and reduce the balance sheet. Minutes stated that the Fed could do so to be “well placed later this year” in order to review the effects of its policy on inflation.