Fed signals half-point interest rate hike 'appropriate' at future meetings
Minutes from the Fed's March meeting show officials are concerned about inflation
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The Federal Reserve signaled that it could raise interest rates by 50-basis points in coming meetings and start to reduce its massive balance sheet at a pace of $95 billion a month as it seeks to cool the hottest inflation in four decades.
Minutes from the U.S. central bank's March 15-16 meeting released on Wednesday show that "many" policymakers would have preferred a larger rate increase last month but determined that a more modest quarter-point hike would be appropriate "in light of greater near-term uncertainty associated with Russia’s invasion of Ukraine."
FED RAISES INTEREST RATES FOR FIRST TIME IN 3 YEARS, PROJECTS 6 MORE HIKES AS INFLATION SURGES
"Many participants noted that one or more [half-percentage-point] increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified," the minutes said.
Policymakers also proposed shrinking the Fed's nearly $9 trillion balance sheet at a maximum monthly pace of $60 billion in Treasurys and $35 billion in mortgage-backed securities. By comparison, the Fed trimmed its balance sheet at a rate of $50 billion a month from 2017 to 2019.
Federal Reserve Chair Jerome Powell pauses during a news conference in Washington on Jan. 29, 2020. (AP Photo/Manuel Balce Ceneta, File / AP Newsroom)
"Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate," the meeting minutes said. "Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant."
Officials are expected to approve the balance-sheet reduction – and possibly raise rates by 50-basis points – at their next gathering on May 3-4.
Fed policymakers voted during their two-day meeting to raise rates by 25-basis points, bringing to an end the ultra-easy monetary policy put in place two years ago to prop up the economy through the COVID-19 pandemic. They also projected at least six more, similarly sized increases over the course of this year.
But in the weeks since then, policymakers – including Chairman Jerome Powell – have floated the possibility of a more aggressive trajectory amid concerns that the central bank waited too long to begin tightening policy.
A man wearing a mask walks past the U.S. Federal Reserve building in Washington on April 29, 2020. (Xinhua/Liu Jie via Getty Images / Getty Images)
"If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so," Powell said two weeks ago. "And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well."
Traders are now pricing in more than a 70% chance of a hefty half-point rate jump when policymakers meet next month, instead of a more modest quarter-point increase, according to the CME's FedWatch tool.
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It would mark the first time since 2000 that the U.S. central bank raised the federal funds rate by 50 basis points.
"The minutes did indicate that a hawkish Fed is clearly ready to lift rates by 50 basis points in one or more meeting going forward as the central bank prepares to shift into a higher gear in its policy normalization process," RSM chief economist Joseph Brusuelas said.