The minutes from the May 3-4, 2022 Federal Open Market Committee (FOMC) meeting showed that the Fed is fully committed to curtailing inflation.
On the progression of the economy, the Committee members noted that “although overall economic activity had edged down in the first quarter, household spending and business fixed investment had remained strong. Job gains had been robust in recent months, and the unemployment rate had declined substantially. Inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures”
On the current acceleration in prices, the Committee stated that “inflation continued to run well above the Committee’s longer-run goal and that inflation pressures were evident in a broad array of goods and services.” Additionally, committee members acknowledged the fact that surging inflation is eroding household real income and impeding businesses’ future investment decisions.
On the expected pace of policy tightening, they stated that “50 basis point increases in the target range would likely be appropriate at the next couple of meetings.” Moreover, committee members stated that they should move monetary policy towards a neutral position.
Key Implications
The minutes revealed that inflation remains of paramount importance for the Fed, with consumer prices in April having surged to 8.3% from year-ago levels. The Russia-Ukraine conflict and recent COVID lockdowns in China, only add to the upside risk. Additionally, the labor market has continued to strengthen, with employment approaching pre-pandemic levels and the unemployment rate sitting at 3.6%, just 0.1 percentage points above its February 2020 level. We expect the Fed to continue to act aggressively until inflation is comfortably trending towards its 2% target.
On June 1st, the Fed will begin reducing the size of its balance sheet, which will work in tandem with interest rate increases to further tighten monetary conditions. This has undoubtedly played through to both government yields and mortgage rates, which have increased markedly since the beginning of the year. The UST 10-year yield, while down from its 2022 peak, has increased by 124 basis points while the 30-year conventional mortgage rate has added 214 basis points.
