A few members of the Federal Reserve’s Federal Open Market Committee favored raising the central bank’s key rate by 50 basis points, according to the minutes of the ‘s Jan. 31-Feb. 1 meeting. The central bank’s policymaking arm had hiked its key rate by 25 bps and signaled more hikes ahead.
“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,” the minutes showed.
The FOMC members were in agreement that they continued to anticipate further rate increases.
“Almost all participants observed that slowing the pace of rate increases at the current juncture would allow for appropriate risk management as the committee assessed the extent of further tightening needed to meet the committee’s goals,” the minutes said.
After the release of the minutes, equities lost altitude. The S&P 500 and Dow both turned red (S&P -0.1%, Dow -0.2%), and the Nasdaq pared its gain to +0.1%. The 10-year yield pared its decline, recently at 3.92% vs. its session low of 3.895% soon before the minutes were released.
While the policymakers observed that financial conditions remained tighter than they were in early 2022, several participants pointed to financial conditions easing over the previous few months. Market participants’ confidence that inflation would quickly fall appeared to contribute to market expectations that the federal funds rate would decline beyond the near term, according to the minutes.
They also discussed issues of financial stability, with several participants bringing up vulnerabilities in the financial system associated with higher interest rates. Such factors included elevated valuations of some asset categories, particularly the commercial real estate sector, the susceptibility of some nonbank financial institutions to runs, and the effect of large, unrealized losses on some banks’ securities portfolios.
The Fed officials said uncertainty regarding their outlooks for economic activity, the labor market, and inflation was high, noting that a variety of factors could lead to pricing pressures being more persistent than anticipated. Specifically, they pointed to the labor market staying tight for longer than expected.
A few participants spoke about the limited effect of recent crypto finance failures on the broader financial system, citing minimal connections of the crypto market to the banking system, thus far.
The debt limit also was a topic of discussion. “A number of participants stressed that a drawn-out period of negotiations to raise the federal debt limit could pose significant risks to the financial system and the broader economy,” the minutes said.
After the meeting, Fed Chair Jerome Powell warned against complacency, saying the disinflationary process is underway, but still hasn’t affected core services costs excluding housing.
Last week, Cleveland Fed President Loretta Mester, who isn’t a voter this year on the FOMC, said she saw a “compelling case” for a 50-bp rate hike at the last meeting. And earlier on Wednesday, St. Louis Fed President James Bullard projects the federal funds rate will have to reach 5.375%.