What is the gist of the FOMC minutes put out by the US Fed on 25th May?

Here is what one can glean from a quick reading of the minutes of the Federal Open Market Committee (FOMC) meeting held on 05th of May 2022. The minutes were published on 25th may, amidst inflation at 41-year highs. Fed has already hiked rates by 75 bps till date.

a) To the credit of the Fed, it has been quite outright in its statement that there would almost be certain rate hikes of 50 bps each in June and July FOMC. This could also be repeated in the September meeting. Fed plans to take the rate level from the current 75-100 bps to a level of 275-300 bps by the end of December 2022.

b) Normally, the Fed usage of certain nomenclature underlines the theme of the meet. An interesting usage this time is the move from “Neutral to Restrictive”. What Fed means is that it is not sufficient to just unwind the COVID looseness. Fed will make the cost of money prohibitive and tighten liquidity to sharply curb consumption-driven inflation.

c) Inflation is a household problem and it is palpable in home budgets. Not surprisingly, the Fed chairperson, Jerome Powell, directly addressed the American public over inflation concerns. When it comes to inflation, it is the inflation expectations that matter a lot more than actual inflation number. That is what the Fed chair is trying to do by directly explaining the narrative in simple terms to the public at large.

d) What we gather from the minutes of the FOMC is that the most members see 2.50% to 2.75% as neutral rate. That means; the year-end rates would tread far beyond that. However, there is a positive twist to the story. The Fed has committed that it would be flexible on rates; should growth falter in a significant way based on a Q4 review.

e) To understand the underlying theme of the Fed minutes, one data point is sufficient. The word “Inflation” appeared more than 60 times in the minutes of the FOMC highlight what was the overarching theme. The message is two-fold. Inflation is not transitory, as originally envisaged, and secondly the Fed is obsessed about controlling inflation.

When will the hawkishness end? There are no answer, but Powell has given a clue, which is self-explicit. According to Powell, the Fed needs “clear, convincing and conclusive” evidence that inflation dipped or is heading to the 2% mark. That certainly looks some time away.