Federal Reserve officials are showing scant support for what would be the most drastic single policy tightening in almost three decades, though they're on board with a series of still-large moves aimed at curbing an inflation spiral.
Chair Jerome Powell and other officials haven't backed a suggestion by their St. Louis Fed colleague James Bullard to consider the first 75 basis point (bps) hike since 1994. But their remarks—which endorsed a 50 bps increase next month and at least one more such move to curb surging prices—were sufficiently hawkish to send U.S. stocks reeling.
"I would support at this point, given where the economy is, a 50 basis point rise in May, and a few more to get to that 2.5 percent" level by the end of the year, Cleveland Fed President Loretta Mester told CNBC on Friday afternoon, referring to the neutral rate that neither speeds up nor slows down growth. "Doing one outsized move in the funds rate doesn't appear to me to be the right way to go. I would rather be more deliberative and more consistent."
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Mester is a voter this year on the Federal Open Market Committee (FOMC), and her comments were likely the final in public from policymakers before they enter a quiet period ahead of their meeting on May 3 and 4.
Investors have reacted sharply to the more hawkish tone from officials. Surging bond yields sent the S&P 500 to a third straight down week, only the second such stretch in 18 months. Interest-rate futures are pricing in half-point hikes over each of the next four meetings, with about 3 total percentage points of tightening over the next year. Powell, speaking on Thursday, said he didn't want to endorse any particular market but added that they were pricing "appropriately."
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"Powell's comments, as well as those of other FOMC members over the past week or two, suggest that the committee has basically concluded that they need to raise rates to neutral by the end of this year. That would involve three 50 basis point moves. And it seems that only a rapid moderation in prices could dissuade them from this path."
—Anna Wong, chief U.S. economist
Fed officials raised their main policy rate by a quarter point to a target range of 0.25 percent to 0.5 percent in March, and minutes of the meeting show that "many officials" favored raising rates by 50 bps at one or more meetings. The minutes also raised expectations that they could start to shrink their balance sheet as soon as May, at a pace stepping up to $95 billion a month.
"The market is already pricing in a full 300 basis points of tightening," said Joseph Lavorgna, chief economist at Natixis North America. "They don't need to do 75 basis points in May, and I don't think they want to go 75 basis points in June."
Bullard, who is also an FOMC voter in 2022, has been leading the Fed's anti-inflation fight. He called for an earlier end to asset purchases and was one of the first to start discussing raising rates by a half point, rather than by the more usual quarter-point increment, which now has widespread support on the committee.
His latest comment has also gotten people's attention. Economists at Nomura Holdings Inc. are now calling for two 75 bps hikes at the June and July meetings. "From the Fed's perspective, hiking multiple times by 75 basis points would bring them to neutral more quickly," Nomura economists said in an April 21 note.
But other policymakers are pushing back. Chicago Fed President Charles Evans told reporters on Tuesday that half-point moves "could make sense," but he doesn't see the need "for anything more than that."
Both San Francisco Fed President Mary Daly and Governor Christopher Waller have steered away from abrupt moves that surprise both consumers and markets, while Governor Lael Brainard said on April 5 that the committee will tighten "methodically" with a "rapid pace" of balance-sheet shrinking contributing to overall restraint.
Fed officials are unsure how allowing their balance sheet to shrink will impact the economy and financial markets, though some of it has already been priced. Lavorgna said $600 billion of runoff is equal to about a half-point hike in the federal funds rate.
They also have high uncertainty on the persistence of inflation, which is running at the fastest pace since the early 1980s. The war in Ukraine and China's coronavirus lockdowns remain unresolved and are likely to add to inflation pressures, though Fed officials aren't sure how much or for how long.
Roberto Perli, head of global policy research at Piper Sandler & Co., said a 75 bps hike will be among the alternatives that policymakers consider in May "but with very little support." If policymakers later think public expectations around the 2 percent inflation target are at risk of moving higher, then "it is reasonable."
—With assistance from Jonnelle Marte.
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