By Yasin Ebrahim
Investing.com -- Federal Reserve policymakers called for further monetary policy tightening, though there was debate among some members at the Fed's February meeting on how quickly to get policy to restrictive levels at a time when a tight labor market threatens to underpin inflation, the Fed’s February meeting minutes showed Wednesday.
"In discussing the policy outlook, with inflation still well above the Committee's 2 percent goal and the labor market remaining very tight, all participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives," the minutes showed Wednesday.
At the conclusion of its previous meeting on Feb. 1, the Federal Open Market Committee raised its benchmark rate by 0.25% to a range of 4.5% to 4.75%.
It was the second straight meeting that the pace of rate hikes was slowed as the rate-setting committee seeks to assess the impact of prior rate hikes, which included four jumbo-sized 75-basis-point hikes in 2022, on the economy.
Fed members continued to flag upside risks to the inflation outlook as evidence that more work needed to be done to curtail price pressures.
"With inflation still well above the Committee's longer-run goal, participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective," the minutes showed.
The decision to downshift on rate hikes sparked debate among Fed members. Some members were against the move to downshift to a 25-basis-point rate hike, preferring to maintain the 50-basis-point pace to push rates to restrictive policy as quickly as possible.
"A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount," the Fed minutes showed.
"The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way," it added.
After months of fighting the Fed and betting that the central bank wouldn’t be able to stick with its higher-for-longer rate regime and would eventually cut rates, market participants appear to be relenting.
In the weeks since the Fed’s decision, market participants are now expecting that it will hike at its next two meetings – in March and May – and are tentatively baking in a June rate increase.
A June rate hike would put the Fed’s funds rate in a range of 5.25% to 5.5%, beyond the 5% to 5.25% projected by the Fed in December, according to Investing.com’s Fed Rate Monitor Tool.
The hawkish repricing of the Fed’s rate-hike path has been driven by surprisingly strong economic data including red-hot January jobs data, further signs of sticky inflation, and a strong retail sales report that suggest more hikes are needed to dent the strength in the economy.
A recent wave of hawkish commentary from some Fed members including Bank of St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester confirming that they weren't in favor of the Fed downshifting to a smaller rate hike at its meeting last month has also played a role in supporting rate-hike expectations.
Expectations for further rate hikes have seen Treasury yields rise sharply higher, ushering in fresh uncertainty in markets that has wreaked havoc on growth stocks including tech.