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The Federal Reserve signaled its plans to increase a key U.S. interest rate by 1/2 percentage point steps at upcoming meetings if inflation remains high or gets even worse, according to minutes of the central bank’s last strategy session in March.
“Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified,” the minutes of the Fed’s meeting showed.
“Many” senior Fed officials were also prepared to raise the bank’s benchmark rate by 50 basis points in March, the minutes revealed, but the Russian invasion of Ukraine persuaded them to take a more cautious stance.
The Federal Open Market Committee lifted its benchmark fed funds rate by a quarter point instead — from near zero to a range of 0.25% to 0.5%.
“In light of greater near-term uncertainty associated with Russia’s invasion
of Ukraine,” the minutes said, “a number of participants” decided that a “25 basis point increase would be appropriate at this meeting.”
Fed Gov. Christopher Waller acknowledged publicly he was one of the officials who initially favored a 1/2-point but backed off after the conflict broke out. The central bank was worried the invasion would could damage the U.S. or global economies.
The Fed’s benchmark rate had been kept near zero since early in the pandemic to cushion the U.S. economy from a deeper recession.
The minutes also indicated the central bank is likely to begin to reduce its $9 trillion balance sheet starting as early as May.
The Fed indicated it plans to run off $60 billion in Treasurys and $35 billion in mortgage backed securities each month. But it could start out with smaller reductions and work its way up to its target “over a period of three months or modestly longer if market conditions warrant.”
The Fed doubled its balance sheet during the pandemic by buying up Treasury bonds and securities composed of home mortgages as part of a strategy to slash long-term rates to record lows.
Low interest rates enabled people to buy more homes, new cars, appliances and other big-ticket items and helped to boost the economy.
The downside is that the long period of low rates also contributed to the biggest spike in U.S. inflation in 40 years. The Fed is now playing catchup after the cost of living jumped to a 7.9% rate in the 12 months ended in February.
The Ukraine conflict also threatens to make inflation worse by raising the cost of oil and food. Russia is a major exporter of oil and grains and Ukraine is a big producer of wheat.
Fed officials are also worried that Covid-related lockdowns in China could exacerbate supply-chain bottlenecks that have been a big contributor to inflation.
While the minutes mentioned inflation 83 times, the word “recession” was not mentioned a single time.
Fed officials across the board insist they will be able to raise interest rates and bring down inflation without derailing the economy. The predict the economy will grow steadily this year and next.
“Barring some really bad economic news in coming weeks, or miraculously good inflation news, the Fed looks to ramp up its tightening cycle with a 50-basis point rate hike on May 4 and a likely announcement to begin reducing its massive balance sheet,” said senior economist Sal Guatieri of BMO Capital Markets.
The Fed’s next strategy session is in the first week of May.
