Federal Reserve officials show little support for the most drastic single monetary tightening in nearly three decades, though they are on board with a series of still-big steps aimed at curbing an inflationary spiral.
Chairman Jerome Powell and other officials did not support the suggestion of their St. Louis Fed colleague James Bullard to consider the first 75 basis point hike since 1994. But their comments – which advocated a 50 basis point hike next month and at least one more such moves to curb rising prices – were still hawkish enough to shake US stocks.
“I would support a 50 basis point hike in May at this point, given the state of the economy, and a few more basis points to get to that 2.5 percent level by the end of the year,” said Loretta Mester, Cleveland Fed President. to CNBC on Friday, referring to the neutral rate, which says growth is neither accelerating nor slowing.
“An outsize move in interest rates doesn’t seem like the right path to me. I would rather be more considered and consistent.”
Ms. Mester is a voter on the Federal Open Market Committee this year and her comments were likely the last in public from policymakers before entering a quiet period ahead of her May 3-4 meeting.
Investors have reacted sharply to officials’ more hawkish tone. Rising bond yields sent the S&P 500 down for a third straight week, only the second such stretch in 18 months.
Interest rate futures are pricing in a half-point hike at each of the next four sessions and a total of about 3 percentage points of tightening over the next year. Mr Powell said on Thursday he did not want to support any particular market but added that the prices were “reasonable”.
“Comments by Powell, as well as those of other FOMC members over the past week or two, suggest that the committee has basically come to the conclusion that they need to raise rates to neutral by the end of this year. That would involve three 50 basis point moves. And it seems only rapid price dampening could throw them off that path,” said Anna Wong, US chief economist at Bloomberg.
Fed officials raised their main interest rate by a quarter point in March to a target range of 0.25% to 0.5%, and meeting minutes showed that “many officials” supported a 50 basis point rate hike at one or more meetings. The minutes also raised expectations that they could start shrinking their balance sheets as early as May, at a pace of up to $95 billion a month.
“The market is already pricing in a full 300 basis points of tightening,” said Joseph Lavorgna, chief economist at Natixis North America. “They don’t have to do 75 basis points in May and I don’t think they want to do 75 basis points in June.”
Mr. Bullard, who is also a FOMC voter in 2022, has spearheaded the Fed’s fight against inflation. He called for an earlier end to asset purchases and was among the first to discuss a half-point hike in interest rates, rather than the more usual quarter-point hike that now has broad support in the committee.
His recent comment also caught people’s attention. Economists at Nomura Holdings are now calling for two 75 basis point hikes at the June and July meetings. “From the Fed’s perspective, multiple hikes of 75 basis points would take it to neutral faster,” Nomura economists said in an April 21 note.
But other policymakers are pushing back.
Chicago Fed President Charles Evans told reporters Tuesday that moves by half a point “might make sense,” but he sees no need “for more than that.”
Both San Francisco Fed President Mary Daly and Gov. Christopher Waller have also stayed away from abrupt moves that surprise both consumers and markets, while Gov. Lael Brainard on the 5th contraction adding to general restraint .
Fed officials are unsure how allowing their balance sheet to shrink will affect the economy and financial markets, although some of this has already been priced in. Mr. Lavorgna said $600 billion in outflows is about the equivalent of a half-point hike in the federal funds rate.
They also have great uncertainty about the persistence of inflation, which has been at its fastest since the early 1980s. The war in Ukraine and China’s coronavirus lockdowns remain unresolved and likely to add to inflationary pressures, though Fed officials aren’t sure by how much or for how long.
Updated April 24, 2022 4:45 am
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