- Officials Agreed Need to Move ‘Expeditiously’ To Neutral
- ‘Most’ Thought 50 bp Hikes in June, July Likely To Be Appropriate
- ‘Many’ Thought ‘Expediting’ Tightening Would Let Fed Assess Stance Later
- ‘Several’ Saw Challenge Restoring Price Stability With Strong Job Market
- ‘A Number’ Favored MBS Sales Once Balance Sheet Reduction Underway
By Steven K. Beckner
(MaceNews) – Federal Reserve officials were largely united in their determination to vanquish inflation at their early May Federal Open Market Committee meeting, but minutes of the meeting released Wednesday suggest potential divergences of views in the months ahead.
The staff-prepared summary of the rate-setting body’s monetary policy discussions show consensus on the near-term need to raise short-term interest rates more aggressively, and most thought that would likely remain the case through July. But after moving “expeditiously” toward a “neutral” policy stance, the minutes suggest less unanimity on the likely rate path down the road.
The minutes say participants thought going beyond neutral to a “restrictive stance of policy” “may well become appropriate.” But there seems to have been less agreement on how quickly the FOMC should get to neutral or restrictive. The minutes say “many” participants thought it best to “expedite” tightening to get the federal funds rate. And “most,” not all, favored further 50 basis point rate hikes at the subsequent two meetings.
“Several” officials were skeptical whether the FOMC would be able to restore price stability while also sustaining a strong labor market.
After leaving the zero lower bound with a 25 basis point increase in the funds rate at its March 15-16 meeting, the FOMC lifted its policy rate by 50 basis points on May 4 for the first time in 22 years. That left the funds rate target range at 75-100 basis points.
The FOMC also announced it would begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, following a previously announced plan to allow increasing amounts of maturing securities to run-off or be folled over. The Fed will initially cap runoffs at $30 billion per month for Treasury securities and increase the cap to $60 billion per month after three months. For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.
After that rate decision was announced, Chairman Jerome Powell told reporters further such moves would be “on the table” at the June 14-15 and July 26-27 meetings. Doing so would leave the funds rate in a target range of 175-200 basis points heading into the Sept. 20-21 meeting.
That would still be well shy of “neutral.” The median “longer run” or putative “neutral” funds rate which FOMC participants estimated in their March Summary of Economic Projections was 2.4% – down inexplicably from 2.5% in the December SEP. Some put the “neutral” rate – a composite of the real short-term interest rate and inflation – considerably higher. Powell said “current estimates on the committee are two to three percent.” Some think even 3% is too low, with inflation twice that high.
The minutes say “all participants concurred that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high and well above the Committee’s 2% inflation objective.”
“Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 50 basis points at this meeting,” the minutes continue. “They further anticipated that ongoing increases in the target range for the federal funds rate would be warranted to achieve the Committee’s objectives.”
There was also full agreement that “it was appropriate to start reducing the size of the Federal Reserve’s balance” sheet but there was not unanimity on the proper handling of MBS. The minutes say only “a number of participants remarked that, after balance sheet runoff was well under way, it would be appropriate for the Committee to consider sales of agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities.”
The FOMC was united on the broader policy vision, judging from the minutes.
“All participants reaffirmed their strong commitment and determination to take the measures necessary to restore price stability,” they report. “To this end, participants agreed that the Committee should expeditiously move the stance of monetary policy toward a neutral posture, through both increases in the target range for the federal funds rate and reductions in the size of the Federal Reserve’s balance sheet.”
But there was some division over how fast to move rates up. Reflecting what Powell told reporters, the minutes say “most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings. Many participants assessed that the Committee’s previous communications had been helpful in shifting market expectations regarding the policy outlook into better alignment with the Committee’s assessment and had contributed to the tightening of financial conditions.”
Although there have been signs of slowing since, the meeting took place in a climate of still strong economic activity. The minutes speak of “robust consumer demand, healthy household balance sheets, and inventory rebuilding,” as well as labor demand outstripping supply. However, risks to inflation and inflation expectations were seen as “to the upside,” aggravated by the war in Ukraine and anti-Covid lockdowns in China.
Against that background, the minutes say “participants agreed that the economic outlook was highly uncertain and that policy decisions should be data dependent and focused on returning inflation to the Committee’s 2% goal while sustaining strong labor market conditions.”
“At present, participants judged that it was important to move expeditiously to a more neutral monetary policy stance,” the minutes go on. “They also noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
The minutes suggest officials had varying degrees of concern about risks to the outlook that could affect their future policy positions.
Considering the “heightened risks” posed by Ukraine and China to the U.S. and global economies, the minutes say “several participants commented on the challenges that monetary policy faced in restoring price stability while also maintaining strong labor market conditions.”
“In light of the high degree of uncertainty surrounding the economic outlook, participants judged that risk-management considerations would be important in deliberations over time regarding the appropriate policy stance,” they continue.
The minutes add that “many participants judged that expediting the removal of policy accommodation would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”
By implication, not everyone agreed with that approach.
Since the May meeting, Fed officials’ views have evolved. Powell and others have given mixed signals about the likely path of rates. Some have begun to sound a bit more hesitant about committing to continued aggressive monetary tightening.
Atlanta Federal Reserve Bank President Raphael Bostic went so far as to say Monday that “a pause in September might make sense” before determining how much higher or faster rates might need to rise.
The FOMC should be “expeditious but cautious” and “proceed with intention and without recklessness….,” the non-voter said in an essay released the next day. “We all must be ready for the unexpected to occur, assess how risks have changed when it does, and stay aware of shifts in the strength of the economy.”
Voting FOMC members have allowed for a slower pace of rate hikes after mid-year.
Powell said last week that the FOMC will “keep pushing” with rate hikes until it sees “clear and convincing evidence” inflation is heading back toward its 2% goal, even it means that unemployment ticks up “a few tenths” and said the FOMC “won’t hesitate” to push rates above neutral if necessary.
“If we don’t see (evidence inflation is abating) we’ll have to consider moving more aggressively,” Powell said, but he added, “if we do we’ll consider a slower pace.”
Cleveland Fed President Loretta Mester pointed toward the September meeting as a possible pivot toward slower rate hikes. “If by the September FOMC meeting, the monthly readings on inflation provide compelling evidence that inflation is moving down, then the pace of rate increases could slow, but if inflation has failed to moderate, then a faster pace of rate increases may be necessary.”
Reputedly “hawkish” St. Louis Fed President James Bullard advocated Monday that the Fed “should try to get to 3.5% by the end of this year,” but downplayed the possibility of 75 basis point rate hikes when asked about the possibility of 75 basis point moves, saying “50 basis points is a good plan for now.”
What’s more, Bullard said Monday that in 2023 and 2034, Bullard “we could be lowering the policy rate because we got inflation under control.”
The same day, Kansas City Fed President Esther George said she “expect(s) that further rate increases could put the federal funds rate in the neighborhood of 2%” and said “balance sheet reduction plans will also be underway as a tightening mechanism.”
She added that “evidence that inflation is clearly decelerating will inform judgments about further tightening.
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Contact this reporter: steve@macenews.com
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