Fed Members Keen to Move 'Expeditiously' on Rate Hikes, Minutes Show

© Reuters.

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 judged that it was important to move expeditiously to a more neutral monetary policy stance," the minutes showed. 

At the conclusion of its previous meeting on May. 4, the Federal Open Market Committee raised its benchmark rate in a range of 0.75% to 1%. The move marked the biggest Fed rate hike since 2000.

In the press conference that followed the monetary policy statement, Fed Chairman Jerome Powell signaled that further 50 basis point rate hikes would be needed to slow economic growth and rein in elevated inflation. 

"[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.

The Fed chief also quelled fears that the central bank was eyeing much larger rate hikes at upcoming meetings. “Seventy-five basis points is not something the committee is actively considering,” Powell said.

In recent days, however, market participants have been pricing the prospect of the Fed pausing its rate hike cycle later this year to reassess 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.

The data appear in support of a less hawkish Fed. Inflation expectations have been trending lower, and tightening financial conditions are beginning to hurt demand in key areas of the economy including housing and manufacturing.  

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 responded in kind, giving up their recent gains, with 10-year Treasury yields retreating further from 3%.   

A further tightening in financial conditions will get underway next month as the Fed kicks off quantitative tightening -- by trimming its nearly $9 trillion balance sheet.

The Fed will start reducing its balance sheet on June 1, at a pace of $47.5 billion per month.  

Under the plan, the Fed would initially allow $30 billion in Treasury securities and $17.5 billion in agency MBS to roll off its balance sheet, with the intent of gradually stepping up the pace after three months to $60 billion and $35 billion per month, respectively.