Federal Reserve officials discussed the possibility of moving the US central bank to a “restrictive” policy stance that would better fight inflation through more aggressive interest rate increases, but worried that this could undermine the strong recovery in the jobs market.
According to minutes of the most recent FOMC meeting held in early May, most US monetary policymakers agreed on the need to keep increasing the Fed’s main interest rate — currently set at a range of between 0.75 per cent and 1 per cent — by 50 basis points “at the next couple of meetings”.
This would match the Fed’s goal of “expeditiously” getting interest rates back up to a neutral setting, where it is neither boosting nor stunting the economy.
But participants “also noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook” — pointing to the possibility that the Fed may have to target an even higher level of interest rates, either by increasing the pace of its rate rises, lengthening its tightening cycle, or doing both.
Fed officials, including chair Jay Powell, are trying to engineer what they have described as a “soft” or “softish” landing to bring down inflation without triggering a recession, which they acknowledged was a difficult balancing act. “Several participants commented on the challenges that monetary policy faced in restoring price stability while also maintaining strong labour market conditions,” the minutes said.
Even though the Fed minutes pointed to more vigorous action by the US central bank to curb inflation, officials were still wary of committing to a particular policy path over the longer term given lots of uncertainty about the outlook.
“Participants judged that risk-management considerations would be important in deliberations over time regarding the appropriate policy stance,” the minutes said. Less aggressive tightening, or even a pause, may be on the table later in the year if the economy starts to slow down dramatically, though that is not the Fed’s main assumption.
During the last FOMC meeting, several officials also pointed to some risks to financial stability related to the tightening cycle, saying it could “interact with vulnerabilities related to the liquidity of markets for Treasury securities and to the private sector’s intermediation capacity”.
Some Fed officials also cited risks to commodities markets stemming from the disruptions associated with the war in Ukraine. While all participants backed the Fed’s plans to reduce its balance sheet, some suggested the Fed should consider sales of mortgage-backed securities as an additional tool.
A bout of choppy trading following the minutes left the S&P 500 and Nasdaq Composite indices higher, but both remained below session highs hit earlier in the day. Treasury yields, which were lower across maturities on Wednesday, were little changed. The price of BlackRock’s iShares US mortgage-backed securities exchange-traded fund ticked higher.
In public remarks, Powell has vowed to keep tightening monetary policy until the central bank sees “clear and convincing” signs that inflation is slowing and moving back to its 2 per cent target. “We’re going to keep pushing until we see that,” Powell said earlier this month.
On Wednesday, Lael Brainard, the Fed’s vice-chair, said that tackling high inflation was the central bank’s most “pressing challenge”. She noted that “price stability is of greatest importance for lower-income families because they spend more than three-quarters of their paychecks on essentials like groceries, gas or bus fare, and rent — more than double the 31 per cent spent by higher-income households”.
“That is why we are taking strong actions that will bring inflation back down,” Brainard said during a commencement address at the School for Advanced International Studies at Johns Hopkins university in Washington.
Additional reporting by Kate Duguid in New York