Minutes Show Fed Officials Saw Need for More Rate Hikes

Well, at their February 1st meeting, federal reserve officials saw what you were seeing in the economy, an economy that was slowing, a still tight labor market, and inflation still well above their 2 percent target. Growth had been below trend in 2022, the minute say, and had nearly stalled in the fourth quarter. But the minute say, the participants agreed the risks were still to the downside for economic activity. They were worried about an unexpected negative shock that could, quote, tip the economy into recession in an environment of subdued growth. The decision to raise rates by a quarter percentage point was cast as a risk management measure. Many officials felt, quote, a further slowing in the pace of rate increases would better allow them to assess the economy's progress as well as progress towards the Fed's 2 percent inflation target. Not all, however, a few participants, that's the phrase, favored raising the benchmark rate by 50 basis points.

Now, we know from their own comments that Cleveland semester and St. Louis's Jim Bullard were in that group. A few generally means more than two, however, but we don't know how many were involved. Their view was moving half a point would get them to a more restrictive level that they wanted to be at more quickly. Were they hawkish or dovish in these minutes? Well, the minutes say participants noted upside risks to inflation remained a key factor that were shaping the policy outlook. A number of participants observing that a policy stance that proved to be, quote, insufficiently restrictive could halt recent progress in moderating inflationary pressures. Maintaining a restrictive policy stance until inflation was clearly on a path to 2 percent is appropriate, they said, from a risk management perspective.

Now, members also expressed concern about risks to financial stability, particularly in commercial real estate, and they worried about what they called significant risks to the financial system and the broader economy if Congress is unable to raise the debt ceiling. Michael, I just want to let you know the equity markets are coming off their highs. We have the Dow flat now, the S&P 500, just up a tenth of 1 percent. And in terms of yields, we are seeing the two-year yield down four basis points, so better by just a basis point or two as those minutes come out. This was three weeks ago, we should bear in mind. This was before we got extra strong data. And it does appear that there were more officials than just the two non-voters of last week that wanted a 50-basis point move.

So does it imply that this is a more hawkish Fed than we had thought? Well, we're going to have to wait and see how the market sort that out. The immediate reaction, of course, is always kind of knee-jerk, a bit of a roulette wheel. But it appears this is sort of what you would have expected them to be saying and seeing on February 1st. It was, as you mentioned, ahead of the jobs report, ahead of retail sales, ahead of that hot CPI number. So the risks they saw coming out of a week fourth quarter were that the economy could slow further if they went too hard. But they all agreed that they needed to go farther. Now, they didn't say anything in these minutes about going above the consensus 5.

1 percent terminal rate they had adopted on December 14th. But they did need to go farther than the 4.75. They were going to end that day with. But the question was, how fast did you get to that higher rate? And at least as far as we know, more than two of them said they should do it more quickly. Mike, I'm intrigued by this notion that a couple of the voters were suggesting that they could have favored a 50-basis point hike. I'm curious, are there specific comments regarding inflation or growth figures that they're watching in particular that are going to trigger a faster pace of hikes going forward? When you dig in those minutes, what are the indicators that they're especially watching most closely? Well, unfortunately, they don't give us a very good definition of what they would constitute as enough of a move to justify a bigger move.

The feeling was that with inflation still running hot, that even if the economy was slowing, they still needed to raise rates further. And so you could do it more quickly. There's no real talk in here about what would cause them to pause at all. There is an emphasis on continuing with higher rates for longer.

Bloomberg