The Federal Reserve’s minutes from its latest policy meeting earlier this month suggest that not only will the Fed likely hike interest rates by 50 basis points (bps) at the next two meetings, but the central bank may need to go above the “neutral” territory into “restrictive” territory to tame inflation.
In the minutes, Fed officials said that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
By “restrictive,” the central bankers mean bringing the interest rate to a level beyond “neutral,” that would restrict economic growth. Markets are pricing in a policy rate of around 2.5% to 2.75% by the end of the year. However, the Fed’s policy minutes suggest they might need to go beyond that rate.
This month’s rate increase by half a percentage point boosted the Fed’s benchmark rate to a range between 0.75% and 1%. Fed officials also unanimously agreed to begin shrinking its balance sheet starting June 1. The Fed will allow securities in its $9 trillion portfolio to mature without investing in new bonds.
"The Federal Reserve has been ultra-transparent about its plans to raise interest rates and reduce its balance sheet, and capital markets have reacted, to be sure. But there are mounting signs that corporate leaders and money managers are doubtful that the Fed can engineer a soft landing without triggering a recession," added Caleb Silver, Editor-in-Chief of Investopedia.