[Comprehensive] Fed Mentioned Inflation 60 Times, Two More Big Steps... Also Suggests Above Neutral Interest Rate

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. Federal Reserve (Fed), which has pledged to do whatever it takes to curb soaring inflation, confirmed its intention to swiftly raise the benchmark interest rate to the ‘neutral rate’ or higher through consecutive ‘big steps’ (0.5 percentage point hikes). Amid increasing warnings of a recession, this is interpreted as a willingness to accept some degree of short-term economic slowdown.

◇ Inflation Mentioned 60 Times... Insights from the FOMC Minutes

According to the minutes of the May Federal Open Market Committee (FOMC) regular meeting released by the Fed on the 25th (local time), the majority of participants judged that "a 0.5 percentage point increase would be appropriate in the next couple of meetings." This signals additional moves at least through June and July, following the big step taken in May for the first time in 22 years.

The minutes emphasized that "monetary policy stance should be quickly shifted to a neutral level through rate hikes and balance sheet reduction," and that "a ‘restrictive’ policy stance may become appropriate depending on the economic outlook and risks." This indicates a shared recognition within the Fed that the current benchmark rate of 0.75?1.00% needs to be rapidly raised to the neutral rate level or beyond. The neutral rate is the interest rate at which the economy can achieve its potential growth rate without inflationary or deflationary pressures, estimated by the market to be around 2.5%.

In particular, the restrictive stance mentioned in the May meeting is interpreted as a ‘hawkish’ message that accepts the possibility of short-term economic slowdown. Economic media CNBC analyzed it as "intending to go beyond the neutral rate to a level that slows the economy." The Financial Times (FT) predicted that "the Fed may either increase the pace of rate hikes, extend the tightening cycle, or do both simultaneously." Earlier, Fed Chair Jerome Powell stated, "There may be some pain in the process of lowering inflation," but also affirmed, "We will continue to push for rate hikes."

The minutes drew attention by mentioning the word ‘inflation’ 60 times. This reflects the Fed’s deep concern as a self-proclaimed ‘inflation fighter.’ U.S. inflation has recently remained at its highest level in over 40 years.

The minutes noted, "It is too early to be confident that current inflation has peaked," pointing out that "upward pressures remain high due to the Russia-Ukraine war, COVID-19, and other factors." The Congressional Budget Office (CBO) forecasted in a report released the same day that inflation this year and next will far exceed the Fed’s target of 2%. The personal consumption expenditures (PCE) price index, a key inflation gauge monitored by the Fed, will be released on the 27th.

◇ Flexibility for ‘Policy Changes’

However, the Fed reached a consensus that the long-term tightening stance should be adjusted according to uncertainties. While assuming proactive big steps, it is possible to adjust the pace of tightening or temporarily pause it in case of a sharp economic slowdown. Bloomberg News evaluated that "after the big steps, the Fed can have the flexibility to ‘shift gears’ in monetary policy depending on the economic situation in the second half of the year."

Many participants mentioned that by around the end of this year, "we will be in a good position to reassess the policy effects on inflation," suggesting that the monetary policy stance could change around the fourth quarter. The meeting also raised concerns that restrictive policies could harm the labor market and that monetary tightening might pose risks to Treasury market liquidity and financial market stability. Bob Miller of BlackRock predicted, "After the July FOMC, the pace of monetary tightening will be decided based on inflation or labor market conditions."

Following the release of the FOMC minutes, which met market expectations, the New York stock market rallied and closed higher. However, concerns remain that the Fed’s tightening moves could accelerate a recession. Glen Hutchins, former Nasdaq chairman and current North Island chairman, appeared on CNBC’s Squawk Box that day and mentioned the possibility of a recession in 2023.