Fed officials warn rates could hit ‘tight’ levels

WASHINGTON (AP) — Federal Reserve officials agreed when they met earlier this month that they may need to raise interest rates to levels that would weaken the economy as part of their bid to rein in the inflation, which is approaching a four-decade high.

At the same time, many policymakers also agreed that after a rapid series of rate hikes in the coming months, they could “assess the effects” of their rate hikes and, depending on the health of the economy, raise rates at a slower pace.

After their meeting this month, policymakers raised their benchmark short-term rate by half a point, double the usual hike. According to the minutes of the May 3-4 meeting released Wednesday, most officials agreed that half-point hikes “would probably be appropriate” at their next meeting in June and July. Chairman Jerome Powell himself had indicated after this month’s meeting that half-point increases would be “on the table” at the next two meetings.

All officials said the Fed should “rapidly” raise its key rate to a level at which it neither stimulates nor hinders growth, which officials say is about 2.4%. Some policymakers have said they will likely reach that point by the end of this year.

The minutes suggest, however, that there could be heated debate among policymakers over how quickly to tighten credit after the June and July meetings. The economy has shown more signs of slowing and stock markets have fallen sharply since the Fed meeting.

Government reports have indicated, for example, that sales of new and existing homes have fallen sharply since the Fed’s meeting this month, and there are signs that factory output is growing more slowly. Gennadiy Goldberg, senior rates strategist at TD Securities, suggested that Wednesday’s minutes may reflect a more “hawkish” Fed – that is, more focused on rate hikes to contain inflation – that may not be the case now.

Some officials, including Raphael Bostic, president of the Federal Reserve Bank of Atlanta, have signaled since this month’s meeting that the Fed may reconsider its pace of rate hikes in September.

And Loretta Mester, president of the Federal Reserve Bank of Cleveland, said that if there was “compelling evidence that inflation is falling,” the Fed could slow its rate hikes, likely by a quarter point.

“But if inflation hasn’t moderated,” she added, “a faster pace of rate hikes might be needed.”

Minutes released Wednesday signaled a tentative acknowledgment by some Fed officials that recent inflation data “could suggest that overall price pressures may not be worsening further.” At the same time, those officials — the minutes do not name Fed policymakers — stressed that it was “too early to be sure that inflation had peaked.”

Fed officials unanimously agreed that the “US economy was very strong, the labor market was extremely tight, and inflation was very high and well above” the Fed’s 2% target. Powell had expressed similar sentiments during his May 4 press conference.

Fed officials are betting that the general strength of the economy will allow it to withstand significantly higher borrowing rates without leading to prolonged layoffs or a recession.

When Fed officials moved this month to raise their benchmark rate by half a point to a range of 0.75% to 1%, it was their first increase of this magnitude since 2000. Officials also announced that they would start cutting their huge $9 rate. trillion balance sheet, which has more than doubled since the pandemic.

The balance sheet swelled as the Fed bought about $4.5 trillion in Treasuries and mortgage bonds after the pandemic recession in an attempt to hold down longer-term rates. On June 1, the Fed plans to let these securities mature, without replacing them. It should also increase the cost of long-term borrowing.

Powell said the Fed was determined to raise rates high enough to contain inflation, leading many economists to expect the fastest pace of rate hikes in three decades this year. Powell says the central bank is aiming for a “soft landing,” in which higher interest rates cool borrowing and spending enough to slow the economy and slow inflation. But most economists are skeptical that the Fed can achieve such a narrow outcome without causing an economic slowdown.

Stock prices plunged on fears that the Fed’s rate hikes could push the economy into recession. The S&P 500 has fallen for seven straight weeks, the longest such stretch since the aftermath of the dotcom bubble in 2001. The stock index nearly fell into bearish territory last week – defined as a 20% drop from at its peak – but rallied on Wednesday.

The minutes also showed that some policymakers decided it was appropriate to consider selling some of his mortgage-backed securities holdings, rather than just letting them mature. The sales would facilitate the Fed’s transition to a portfolio consisting primarily of Treasuries, according to the minutes.

The Fed said in September it would allow up to $30 billion in mortgage-backed securities to mature each month, along with $60 billion in Treasury bills. Many analysts doubt that the ceiling will be reached for mortgage-backed bonds, as mortgage rates have jumped more than 2 percentage points since the start of the year. This means that fewer homeowners will refinance their mortgage because their current loan rates are lower than the rates currently available in the mortgage market.

Less refinancing would force the Fed to sell mortgage-backed securities to maintain its plans to shrink its balance sheet.

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