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Minutes of the Federal Reserve Board’s last meeting in early May show that officials believed a series of rate hikes higher than is typical would be needed to bring inflation under control – a stance that was more aggressive than markets anticipated prior to the meeting.
The Fed’s policy making committee began its current cycle of raising rates earlier this month with a 50 basis point hike and signaled it plans more increases throughout the year.
The minutes suggest that more hikes of 50 basis points are coming and that policy would perhaps need to shift beyond a neutral level to “restrictive” to curb inflation.
“Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings,” the minutes stated.
Political Cartoons on the Economy
The Fed’s shift at its May meeting has already driven market interest rates higher, with the yield on the 10-year Treasury hitting 3% and sitting Wednesday morning at 2.749%. Mortgage rates, meanwhile, have risen sharply with the 30-year fixed rate loan now at 5.47%.
The central bank also said it would begin paring its holdings of Treasurys and other securities at a rate of $47.5 billion a month in June. After three months, it will increase that to $95 billion a month.
It was the first time since the dot-com crash of 2000 that the Fed had raised rates by more than 25 basis points. If the Fed raised rates again next month by a similar amount, that would be a pattern not seen since 1994.
“Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said at a press conference following the announcement.
The rise in rates, combined with rampant inflation, has cooled the red-hot housing market. Sales of new homes plummeted more than 16% in April and are now off nearly 27% from a year ago. Major retailers such as Walmart and Target have noted a shift in their customers’ purchasing habits away from items like furniture and longer-lasting goods to luggage, apparel and health care products.
The shifts are exactly what the Fed wants to see as it aims to tamp down consumer inflation that is running at an 8.3% annual rate. But there is a fear that the Fed will go too far, prompting a recession.
On Monday, the National Association for Business Economics released its monthly outlook for May, with panelists surveyed increasing their inflation expectations for both 2022 and 2023.
The association downgraded its forecast for economic growth for the fourth quarter of 2022 from 2.9% in February to 1.8%. Expectations for year-over-year growth in the fourth quarter of 2023 were also cut, from 2.3% to 2.1%.
“More than half of respondents estimate the odds of a recession within the next 12 months are greater than 25%,” said Yelena Shulyatyeva, senior U.S. economist for Bloomberg, and head of the survey.