By Yasin Ebrahim
Investing.com -- Federal Reserve policymakers called for further monetary policy tightening until there were "substantially" more signs of slowing inflation, with a "few" members backing a faster path to push rates to restrictive levels as a tight labor market threatens to underpin inflation, the Fed’s Jan. 31- Feb.1 meeting minutes showed Wednesday.
Flagging a very tight labor market and above-trend inflation, all participants continued to "anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives," the minutes showed Wednesday.
Upside risks to the inflation outlook, meanwhile, remained a "key factor shaping the policy outlook," and a restrictive policy stance likely needs to be maintained, the minutes showed.
Ahead of the meeting, data showing a reduction in the pace of inflation was welcomed, but members "stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path."
At the conclusion of its previous meeting on Feb. 1, the Federal Open Market Committee raised its benchmark rate by 0.25% to a range of 4.5% to 4.75%.
It was the second straight meeting that the pace of rate hikes was slowed as the rate-setting committee seeks to assess the impact of prior rate hikes, which included four jumbo-sized 75-basis-point hikes in 2022, on the economy.
"Against this backdrop, and in consideration of the lags with which monetary policy affects economic activity and inflation, almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting," according to the minutes.
But a few members were against the move to downshift to a 25-basis-point rate hike, preferring to maintain the 50-basis-point pace to push rates to restrictive policy as quickly as possible.
"A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount," the Fed minutes showed.
"The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way," it added.
After months of fighting the Fed and betting that the central bank wouldn’t be able to stick with its higher-for-longer rate regime and would eventually cut rates, market participants appear to be relenting.
In the weeks since the Fed’s decision, market participants are now expecting that it will hike at its next two meetings – in March and May – and are tentatively baking in a June rate increase.
A June rate hike would put the Fed’s funds rate in a range of 5.25% to 5.5%, beyond the 5% to 5.25% projected by the Fed in December, according to Investing.com’s Fed Rate Monitor Tool.
The hawkish repricing of the Fed’s rate-hike path has been driven by surprisingly strong economic data including red-hot January jobs data, further signs of sticky inflation, and a strong retail sales report that suggest more hikes are needed to dent the strength in the economy.
"At the beginning of the year, 80% of economists were saying, if we're not in a recession we're about to be," Brian Mulberry, client portfolio manager at Zacks Investment Management told Investing.com's Yasin Ebrahim in an interview on Wednesday. "But with Q4 GDP coming in at 2.9%, and the first quarter of this year shaping up to be another two handle [2%] in terms of GDP, it's really hard to say that's a recessionary period."
A recent wave of hawkish commentary from some Fed members including Bank of St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester confirming that they weren't in favor of the Fed downshifting to a smaller rate hike at its meeting last month has also played a role in supporting rate-hike expectations.
Expectations for higher peak level of interest rates, or terminal rate, have seen Treasury yields rise sharply higher, ushering in fresh uncertainty in markets that has wreaked havoc on growth stocks including tech.
"Our target for the terminal rate is now probably around five-and a-half percent," Mulberry added. "I think that there's a good argument from where we stand today that you'll see at least another 50 to 75 basis points in hikes."