Fed Minutes: May 2022 – Monetary Policy Could Become Restrictive

Federal Reserve officials earlier this month stressed the need to raise interest rates quickly and possibly more than markets expect to address a nascent inflation problem, the minutes of their meeting released Wednesday showed.

Policymakers not only saw the need to raise borrowing rates by 50 points, but also said similar hikes would likely be needed at the next meetings.

They further noted that the policy may need to move beyond a “neutral” stance in which it does not support or limit growth, a key consideration for central bankers that could echo through the economy.

“Most participants believed that increasing the target range by 50 basis points would likely be appropriate in the next few meetings,” the minutes said. In addition, members of the Federal Open Market Committee indicated that “a restrictive policy stance may become appropriate depending on the evolving economic outlook and risks to the outlook.”

During its May 3-4 session, the rate-setting FOMC approved a half-percentage-point increase and drafted a plan, beginning in June, to reduce the central bank’s $9 trillion balance sheet, composed primarily of Treasury bills and bonds. mortgage-backed securities.

That was the largest rate hike in 22 years and came as the Fed attempts to push inflation back to its 40-year high.

Due to market prices, the Fed is currently moving towards a key rate around 2.5%-2.75% by the end of the year, which would be consistent with where many central bankers consider a neutral rate. However, statements in the minutes show that the committee is prepared to go further.

“All participants reaffirmed their strong commitment and determination to take the measures necessary to restore price stability,” the meeting summary said.

To this end, participants agreed that the Committee should soon move the stance of monetary policy toward neutrality through both increases in the target range for the Federal Funds interest rate and reductions in the size of its balance sheet. the Federal Reserve,” it continued. †

On the balance sheet issue, the plan is to drain a capped level of revenue each month, a number that will reach $95 billion by August, including $60 billion in Treasuries and $35 billion in mortgages. The minutes further indicate that an outright sale of mortgage-backed securities is possible, provided that this is announced well in advance.

Inflation was mentioned 60 times in the minutes, with members expressing concerns about rising prices, even with confidence that the Fed’s policies and the easing of several factors, such as supply chain problems, coupled with tighter monetary policy, will situation would help. On the other hand, officials noted that the war in Ukraine and the Covid-associated lockdowns in China would exacerbate inflation.

In his press conference after the meeting, Fed Chair Jerome Powell took the unusual step of addressing the US public directly to emphasize the central bank’s determination to curb inflation. Last week, Powell said in an interview with the Wall Street Journal that “clear and compelling evidence” would be needed that inflation would fall to the Fed’s 2% target before rate hikes stopped.

Along with their determination to curb inflation came concerns about financial stability.

Officials expressed concern that tighter policies could create instability in both treasury and commodity markets. In particular, the minutes warned against “the trading and risk management practices of some key participants in the commodities markets” [that] were not fully visible to regulatory authorities.”

Risk management issues “can give rise to significant liquidity requirements for major banks, broker-dealers and their clients.”

Still, officials remained committed to raising rates and shrinking the balance sheet. The minutes said the Fed would be “well positioned later this year” to re-evaluate the policy’s effect on inflation.

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