Fed minutes point to more rate hikes that go further than the market anticipates

Federal Reserve officials earlier this month stressed the need to raise interest rates quickly and possibly more than markets anticipate to tackle a burgeoning inflation problem, meeting minutes showed.

policymakers saw the need to raise benchmark borrowing rates by 50 points and said similar hikes likely would be necessary in the next several meetings

Policy may have to move past a neutral stance in which it is neither supportive nor restrictive of growth, an important consideration for central bankers that could echo through the economy.

The minutes stated that most participants thought 50 basis point increases in the target range would be appropriate at the next couple of meetings. Federal Open Market Committee members indicated that a restrictive stance of policy may be appropriate depending on the evolving economic outlook and the risks to the outlook.

The May 3-4 session saw the rate-setting committee approve a half percentage point hike and lay out a plan to reduce the central bank's $9 trillion balance sheet consisting mostly of Treasurys and mortgage-backed securities.

The rate increase was the biggest in 22 years and came at a time when the Fed is trying to bring down inflation.

Market pricing currently sees the Fed moving to a policy rate of 2.5%-2.75% by the end of the year, which would be in line with where many central bankers view a neutral rate. The minutes show that the committee is prepared to go beyond there.

The meeting summary stated that all participants were committed to restoring price stability.

Participants agreed that the Committee should move the stance of monetary policy toward a neutral posture by increasing the target range for the federal funds rate and reducing the size of the Federal Reserve's balance sheet.

The plan is to allow a capped amount of proceeds to roll off each month, a number that will reach 95 billion by August, including $60 billion Treasurys and $35 billion for mortgages. The minutes show that a sale of mortgage-backed securities is possible, with notice of that happening well in advance.

The minutes mentioned inflation 60 times, with members expressing concern about rising prices even though they were confident that Fed policy and the easing of several contributing factors would help the situation. The war in Ukraine and the Covid-associated lockdowns in China would make inflation worse.

At his post-meeting news conference, Fed Chairman Powell spoke directly to the American public to stress the central bank's commitment to tame inflation. Powell said in a Wall Street Journal interview that it would take "clear and convincing evidence" that inflation was coming down before the rate increases stopped.

Concerns about financial stability came along with their resolve to bring down inflation.

Officials were concerned that tighter policy could cause instability in the market. The trading and risk-management practices of some key participants in commodities markets were not fully visible to regulatory authorities.

Large banks, broker-dealers, and their clients could face significant liquidity demands due to risk-management issues.

Officials were still committed to raising rates and reducing the balance sheet. The minutes stated that the Fed would have to reexamine the effect policy was having on inflation later this year.