Fed Minutes: Peak Target For Benchmark Rate Is 3.13% – NMP Skip to main content

Fed Minutes: Peak Target For Benchmark Rate Is 3.13%

May 26, 2022
Federal Reserve Bank

Minutes of May meeting reveal discussion of raising rates faster than anticipated.

Following its two-day meeting earlier this month, the Federal Reserve’s Federal Open Market Committee (FOMC) announced the expected 0.5% increase in its benchmark federal funds rate, the largest increase in 22 years.

Minutes of the meeting, held May 3-4, were released on Wednesday and reveal discussion of raising rates more quickly, and higher, than observers may have anticipated.

According to the minutes, a survey of FOMC members projected additional 0.5% increases in the target range for the benchmark rate “at the two following meetings, and another 125-basis-points of increases by the middle of next year, bringing the projected midpoint of the target range to a peak of 3.13% — substantially higher than in previous surveys.”

Committee members cited “significant uncertainty regarding the economic outlook and the degree of policy tightening ahead,” the minutes state.

“Participants agreed that the economic outlook was highly uncertain and that policy decisions should be data dependent and focused on returning inflation to the committee’s 2% goal, while sustaining strong labor market conditions,” the minutes state.

The U.S. Bureau of Labor Statistics reported earlier this month that the Consumer Price Index, often considered the inflation rate, was at 8.3%.

During a news conference following the May meeting, Fed Chairman Jerome Powell was asked whether the committee would consider a 0.75% or 1% increase in the Fed rate and he said it was “not something the committee is considering.” But he added that if higher rates were appropriate based on where inflation rates head, the committee would do that. 

Powell also stated at that time that the Fed’s goal for the near future is to move its policy rate to more normal, or neutral, rates of 2% to 3%, as long as there is full employment and a strong economy.

Following the meeting, the Fed also announced plans to reduce its $9 trillion balance sheet in June. The plan is to reduce Treasury securities holdings by $30 billion a month for three months and then increase it to $60 billion per month. For agency debt and agency mortgage-backed securities, the cap will be set at $17.5 billion a month for three months and then increase it to $35 billion a month.

The reduction in its balance sheet reverses the quantitative easing policy the Fed had maintained during the COVID-19 pandemic in an effort to spur economic growth. 

According to the meeting minutes, participants judged that it was “important to move expeditiously to a more neutral monetary policy stance.” They also noted that a restrictive stance “may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”

Participants cited developments associated with Russia’s invasion of Ukraine and the COVID-related lockdowns in China, saying they pose “heightened risks” for both the United States and the world’s economy.

Still, several committee members cited the challenges that monetary policy faced in restoring price stability, while also maintaining strong labor market conditions. 

“In light of the high degree of uncertainty surrounding the economic outlook, participants judged that risk-management considerations would be important in deliberations over time regarding the appropriate policy stance,” the minutes state.

The minutes add, “Members agreed that, with appropriate firming in the stance of monetary policy, they expected inflation to return to the committee’s 2% objective and the labor market to remain strong."

About the author
David Krechevsky was an editor at NMP.
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