The minutes have been released for the US Federal Reserve Board and Federal Open Market Committee’s (FOMC) May meeting, and they reveal fresh insights as to where interest rates are set to go in the coming months.
The notes indicate that not only were the participants of both committees unanimous in calling for the 0.50% hike the Fed made on May 4 -- the largest since the year 2000 -- two more half points are to follow in June and July, with another 125 basis points in hikes to come by mid 2023, which would bring the Fed’s target range to a peak of 3.13%.
While acknowledging the US economy remains “very strong” and the labor market “extremely tight”, inflation is stubbornly far above the Committee’s 2% objective; it currently sits at a close-to four-decade high of 8.3%, prompting policymakers to tighten by “more than currently expected.”
“Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate,” the minutes state.
“All participants reaffirmed their strong commitment and determination to take the measures necessary to restore price stability. To this end, participants agreed that the Committee should expeditiously move the stance of monetary policy toward a neutral posture, through both increases in the target range for the federal funds rate and reductions in the size of the Federal Reserve’s balance sheet. Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings.”
The Impact on Canadian Borrowers
As the Bank of Canada generally moves in lockstep with monetary policy made south of the border, these most recent peeks into the Fed’s rationale indicate steeper rate hikes are certainly in store for Canadians, to come over the five remaining policy announcements this year.
It’s already widely anticipated that a 0.5% increase will be made on June 1 given April’s 6.8% inflation reading, but some experts are starting to anticipate 0.75 - 1% hikes could be a possibility, and that the BoC could be on track to exceed its neutral range of 2 - 2.75% by the time this hiking cycle is through.
READ: Homeowners With HELOCs Most Likely to Feel Heat of Rising Rates
“Some analysts and economists are predicting even steeper increases than 0.5 per cent at the next announcement. While a higher hike may feel like a real squeeze to homeowners now, it may mean more tempered increases for the rest of the year,” says Leah Zlatkin, LowestRates.ca expert and licensed mortgage broker.
“Homebuyers and owners need to continue to run the numbers on their budgets to be prepared, including those folks who have taken out home equity loans to fund renovations or second home purchases over the pandemic.”
However, there’s still much that remains to be seen, points out Michael Gregory, BMO’s Deputy Chief Economist, Head of US Economics, and Managing Director of Economics. In an investor note, he writes that “we didn’t get many hints” on how US policy -- and by extension Canada’s -- will play out past July.
“At that point, the FOMC will still be a bit shy of its self-projected 2%-to-3% range of neutral readings (and the 2.375% median). The Minutes said: “At present, participants judged that it was important to move expeditiously to a more neutral monetary policy stance. They also noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.” But, no hints on whether this meant more 50s, a resort back to 25s or some meetings would be skipped,” he writes.
“As it conducts a pair of 50 bp rate hikes during the next two months, the Fed will likely keep its cards closer to its chest, waiting to see how the outlook and risks unfold before proffering what we expect will be another strong policy signal. That is, unless further worrisome inflation developments force the Fed to lay its cards on the table.”
