Thursday, December 1 2022

WASHINGTON, May 25 (Reuters) – All participants in the Federal Reserve’s May 3-4 policy meeting backed a half-percentage-point rate hike to fight inflation. without action from the US central bank, the minutes of the session were released on Wednesday.

This month’s 50 basis point hike in the Fed’s benchmark overnight interest rate was the first of this magnitude in more than 20 years, and “most participants” judged further hikes of this magnitude would be “probably appropriate” at Fed policy meetings in June and July, according to the minutes.

“All participants agreed that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high,” the minutes said, with risks of even faster inflation “forced on the rise” given ongoing global supply issues, Ukraine war and ongoing coronavirus lockdowns in China.

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In this context, “participants agreed that the (Federal Open Market) Committee should move the monetary policy stance quickly towards a neutral stance… They also noted that a restrictive policy stance could well become appropriate”.

“Many participants” felt that booking rate hikes now “would leave the Committee well placed later this year to assess the effects of policy tightening.”

US stocks rose after the report was released before reversing. Futures traders have eased their bets on rising rates, but still solidly price increases of half a percentage point in June and July, with increases of a quarter of a percentage point in the three remaining meetings in 2022.

Bob Miller, head of U.S. fixed income for investment giant BlackRock, said the minutes indicated July would be a key pivot for the Fed.

With two more half-percentage-point hikes firmly in sight, “the political trajectory after July will depend on the path of inflation and progress toward correcting…imbalances in the labor market,” it said. he wrote after the publication of the minutes. “If these factors improve, the Fed gains some breathing room” to move on to fewer rate increases, but otherwise it could be forced to rely more on the economy.

The minutes showed that the Fed was scrambling to figure out how best to steer the economy toward lower inflation without causing a recession or pushing up the unemployment rate substantially – a task that “many participants” at this month’s meeting said it was proving difficult in the current environment.

By the Fed’s preferred measure, inflation was more than three times higher than the central bank’s 2% target.

“A number” of Fed participants, however, said the data had begun to indicate that inflation “may not deteriorate further.”

But even they agreed it was “too early to be sure that inflation had peaked”.

WIDE RANGE OF POSITIONS

The economy remained strong, the minutes note, with households in such good shape that Fed officials said it may be harder to get them to stop spending and ease price pressure. .

Business supply constraints “were still significant,” the minutes note, hiring remained difficult and “businesses’ ability to meet demand remained limited,” a recipe for continued price increases.

With little certainty about when these conditions might ease, officials began to present a wide range of positions on what might happen after the next rate hikes, from an outright pause in rising borrowing costs this fall to calls for an aggressive series of half-percentage point increases at meetings in September, November and December. Read more

Inflation data has yet to show a convincing decline from levels that have baffled Fed officials and drawn comparisons to the inflationary shocks of the 1970s and early 1980s.

Meanwhile, some analysts have raised their recession risks, and investors in contracts linked to the federal funds rate have recently lowered their estimates of rising interest rates.

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Reporting by Howard Schneider Additional reporting by Ann Saphir; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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