Fed meeting minutes: It is necessary to continue raising interest rates, and a few officials prefer 50 basis points

On Wednesday afternoon New York time, the Federal Reserve released the minutes of its meeting from January 31 to February 1. Almost all Federal Reserve officials supported a 25 basis point rate hike, and a "few" members expressed their desire to raise interest rates by 50 basis points. The minutes wrote: "Participants in favor of a 50 basis point rate hike noted that, given their concerns about the risks to achieving price stability in a timely manner, the larger the rate hike, the faster the target range would approach a level that they believed would achieve a sufficiently restrictive stance."

After the release of the minutes, bond yields rose, with the 2-year Treasury yield, which is most sensitive to Fed policy expectations, rising to about 4.69%. The dollar also rose against a basket of currencies, but U.S. stocks fell back. Bitpush terminal data showed that as of 3:00 PM EST, Bitcoin was trading at $23,853, down 3% in 24 hours. Ethereum was trading at about $1,600, down 3.7%.

Continued rate hikes are necessary

The discussion suggested the central bank could raise rates by 25 basis points at its next meeting on March 21-22. But the minutes noted that the slower pace came with heightened concerns about still-elevated inflation.

The summary reiterated that members believed that "sustained" rate hikes were necessary, that there were signs that inflation was declining but not enough to offset the need for further rate hikes, that inflation "remained well above" the Fed's 2% objective, and that the labor market "remained very tight, resulting in persistent upward pressure on wages and prices."

Participants observed that uncertainty related to the outlook for economic activity, the labor market, and inflation was high, with risks cited including the war in Ukraine, the reopening of the Chinese economy, and the possibility that tight labor markets could remain longer than expected.

The minutes said: "Inflation data collected over the past three months showed a slowing in the pace of monthly price increases, but stressed that more evidence of progress across a wider range of prices was needed to be confident that inflation was on a sustained downward path."

Recession risk

The minutes showed the Fed was moving toward a likely end point for its current rate hikes, while also leaving an open mind about how high it could ultimately raise rates without slowing inflation.

“Some” policymakers at the meeting noted that the risk of a U.S. recession this year remains “elevated” as the Fed continues to work to tame inflation, which has surged to a 40-year high in 2022.

The U.S. central bank has raised its policy rate from a near-zero starting point in March last year to the current range of 4.50%-4.75% at eight meetings. Bitpush previously reported that the policy statement released on February 1 said the Fed still needs to "continue to raise interest rates," shifting the focus from "whether to raise interest rates" to "how much to raise them." Data since the last meeting showed that U.S. economic and employment data continued to grow at an unexpected pace.

Economic data for January showed that inflation was growing at a slower pace than its peak in the summer of 2022, but the pace of slowdown was slowing. The consumer price index rose 0.5% from December and 6.4% from a year earlier. The producer price index, which measures input costs at the wholesale level, rose 0.7% month-on-month and 6% year-on-year. Both figures were higher than Wall Street expected.

The labor market is also hot, suggesting that the Federal Reserve’s rate hikes, while hitting the housing market and some other rate-sensitive areas, have yet to filter through to much of the economy.

The complexity of the Fed and the market is that many decisions are based on past data. Investors have long noticed that monetary policy adjustments have a "lag effect" and are worried that excessive interest rate hikes will drag down the US economy. But the minutes show that the Fed is more worried about the risk of persistently high inflation than an economic slowdown or recession. Fed officials pointed out that it is important that "overall financial conditions are consistent with the degree of policy constraints implemented by the committee to return inflation to the 2% target."

CME FedWatch data showed that the market currently expects the US central bank to raise interest rates by 25 basis points at its March, May and June meetings, with investors raising their expectations for the peak interest rate to around 5.36%.