MNI: Restrictive Policy May Become Appropriate--Fed Minutes

Federal Reserve officials think monetary policy may have to become restrictive in order to rein in inflation that has surged far above policymakers' worst fears, as they agreed unanimously to raise interest rates by 50 basis points at their May meeting, minutes released Wednesday showed.  

Many -- but not all -- FOMC participants thought additional rate hikes of the same magnitude would be warranted in the next couple of meetings. There was no discussion of larger increases and widespread agreement on the decision to begin shrinking the USD9 trillion balance sheet. 

"A restrictive policy stance may well become appropriate depending on the evolving economic outlook and the risks to the outlook," the minutes said, highlighting that officials saw upside risk to inflation. 

"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," the minutes said. 

U.S. CPI inflation jumped 8.5% in the year to April, while the Fed's preferred PCE measured climbed 6.6% in the year to March -- both well above the central bank's 2% goal. 

"Members also agreed that Covid-related lockdowns in China were likely to exacerbate supply chain disruptions," the report said. 

Fed officials will next meet in June, when they will release the quarterly Summary of Economic Projections. While policymakers' rate forecasts may show a hawkish shift since the March SEP, that may be tempered by rising concerns about a growth slowdown -- and even the possibility of a recession. 

The minutes did not mention the prospect of a contraction. 

Ukraine and China present "heightened risks for both the United States and economies around the world. Several participants commented on the challenges that monetary policy faced in restoring price stability while also maintaining strong labor market conditions." 

Fed Chair Jerome Powell recently moderated his optimism about how easy it might be to achieve such a "soft landing."

Officials described the economy as very strong and the labor market as extremely tight as the jobless hovers near historic lows of 3.6%.

A number of officials said the Fed should consider sales of its mortgage-backed securities holdings, "after balance sheet runoff was well under way. Any program of sales of agency MBS would be announced well in advance."

Several participants also noted the potential for "unanticipated effects on financial market conditions" related to the asset-runoff process.