Written by Yassin Ibrahim
Investing.com – Policymakers agreed that the central bank should act “quickly” on raising interest rates to contain inflation, but played down the chances of a recession pointing to a strong labor market, a report from Dec. 3-4 shows. May this Wednesday (25).
“[P]The minutes showed that participants felt it was important to move quickly towards a more neutral stance on monetary policy.”
At the conclusion of their previous meeting in May. 4, the Federal Open Market Committee (FOMC) raised its price in the range of 0.75% to 1%. The move was the largest interest rate increase by the Federal Reserve since 2000.
In the press conference following the monetary policy statement, Fed Chair Jerome Powell indicated that an additional 50 basis points are needed to slow economic growth and contain high inflation.
“There is a broad feeling on the committee that additional 50 basis point increases should be put on the table at future meetings,” Powell said at the May 4 news conference.
The Fed chief also quelled fears that the central bank would look to raise interest rates further in upcoming meetings. “75 basis points is not something the committee is actively considering,” Powell said.
However, in recent days, market participants have been seeking to expect the Fed to interrupt the rate-raising cycle later this year to reassess progress on inflation.
“I have a basic view that, for me, a break in September can make sense,” he told reporters Monday after a speech at the Rotary Club of Atlanta.
The data appears to support the less robust Fed. Inflation expectations are heading lower and tighter financial conditions are beginning to affect key areas of the economy, including housing and manufacturing.
The 10-year inflation rate – a key gauge of inflation expectations over the next decade – fell to 2.6% earlier this week, still above the Fed’s 2% target but less than more than 3% at the end of February.
Against the less aggressive narrative emanating from Fed officials, market participants are reassessing their bets on the final federal funds rate, or peak fed funds rate.
“The idea of 75 basis point increases appears to be holding back as we hear little about the Fed’s final interest rate in the +3% region,” ING said in a note earlier this week.
Treasury yields responded similarly, giving up recent gains as yields fell 3%.
Further tightening of financial conditions will begin next month, as the Federal Reserve begins quantitative tightening – slashing its balance sheet by nearly $9 trillion.
The Fed will begin cutting its balance sheet on June 1, at a pace of $47.5 billion per month.
Under the plan, the Fed will initially allow $30 billion in Treasuries and $17.5 billion in MBS branch from its balance sheet, with the intention of gradually increasing the pace after three months to $60 billion and $60 billion. .
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