NEW YORK (Reuters) – All participants at the Federal Reserve’s May 3-4 policy meeting backed a half-percentage-point rate increase to combat inflation they agreed had become a key threat to the economy’s performance and was at risk of racing higher without central bank action, newly released minutes of the session showed.

The 50-basis-point rate increase this month was the first of that size in more than 20 years, and has set the Fed on course for a quick tightening of monetary policy, with “most participants” judging that further half-percentage-point increases would “likely be appropriate” at upcoming Fed sessions in June and July, according to the minutes, which were released on Wednesday.

STORY:

MARKET REACTION:

STOCKS – The increased gains of +0.75%

BONDS – The 10-year Treasury note yield fell to 2.5577%. 2.5161 % ticked up in yield on the 2-year Treasury note

DOLLAR : A gain of 0.39% was recorded in the dollar.

COMMENTS:

EDWARD MOYA SENIOR MARKET ANALYST THE AMERICAS OANDA NEW YORK (emailed).

US stocks edged up as investors anticipated that a weakening economy would force the Fed out of its tightening cycle.  Although the FOMC minutes have been over three weeks since they last met, they offered some hope they might adjust their tightening policy later in this year.  As they continue to fight inflation, the Fed sees only 50 basis points increases at their next two meetings.  Although the Fed remains optimistic about the economy’s prospects, they have begun to be more concerned about markets for Treasuries as well as commodities.    

MICHAEL JAMES, MANAGING DIRECTOR OF EQUITY TRADING, WEDBUSH SECURITIES, LOS ANGELES

    “Given all the negativity we’ve been dealing with for the last several weeks this is at least initially an exhale of relief that commentary wasn’t far more hawkish.”

    “All of this has to be taken with a grain of salt and keeping in mind that these are backward looking comments.”

    “The Fed has a very difficult line to try and walk between wanting to stifle inflation and not wanting to too negatively impact the economy.”

BOB MILLER (emailed), HEAD of AMERICAS FUNDAMENTAL FIXED INDIVIDUE BLACKROCK

“The FOMC meeting minutes released today don’t provide us with any new policy information, but details of the discussion around the table do allow us to glean some insight into the Committee’s thinking on the forward path. Specifically, it’s very clear that bringing down inflation was (and is) the focus at the Fed’s May meeting; Chair Powell has reinforced the need to expeditiously raise rates toward broad estimates of neutral, as risks to inflation still tilt to the upside. This is why the Chair presented an initial case of 50 basis points (bps), policy rate rises at the June or July meetings. Other Fed speakers also supported the view.

“We think that after the July meeting the Fed is likely to become more “data dependent” with regard to rate hikes, which essentially means that the policy path after July will depend upon (a) the trajectory of inflation and (b) progress toward correcting the supply/demand imbalances in the labor market. In our view, if those factors are “improving” (which is to say lower levels of inflation and reduced labor market imbalances), then the Fed gains  some breathing room and can shift policy adjustments to 25 bps increments, while still pursuing something in the estimated range of neutral. This approach would probably result in lower market volatility and less likelihood of an economy hard landing. However, the Fed could be forced to keep adjusting policy in increments of 50 bps if these conditions do not improve following the July FOMC Meeting. This will support market volatility but increase the chance of negative economic outcomes. In that scenario, 75-bps increases may be considered.

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY

“At this point for the market to really rally it needs some indication that the Fed has taken into account what is going on and is either really slowing the pace or changing things and that is just not the way they have typically have done it. They have tended to be very gradual in their guidance, I just don’t think there is enough there. On the positive side though, it wasn’t extremely hawkish, it was in some ways just a more moderate reflection of what is going on right now, a combination of inflation and what is probably a slowing economy.”

“The market looks ahead and their feeling is that the worst of the inflation news may be behind us. One exception is the volatility in energy prices. Russia or Ukraine could be a major concern. But otherwise I think the market is looking to stabilize here and looking a little bit forward to the point where the Fed can start to issue some different guidance and say the economy has slowed enough that they don’t see the need to continue to raise rates.”