U.S. Federal Reserve suggests increasing key interest rate to tackle inflation


According to the minutes of the May Federal Open Market Committee (FOMC) policy meeting released on May 25, The US Federal Reserve is expected to raise multiple 50-basis-point interest rate hikes this year to fight inflation.

In the report of the meeting's minutes, committee members noted that the first quarter's economic construction did not signal the future. They also expected the real gross domestic product to grow solid in the second quarter.

Despite the solid economic growth, the committee said that it was still paying close attention to the risks to the outlook. It also suggested that it might need to adopt a more restrictive policy stance to prevent inflation from rising too fast.

Ukraine-Russia conflict threatens recovery

According to the committee, the situation in Ukraine-Russia and China's COVID-19 lockdowns poses significant risks to the recovery. It is also said that these developments could affect the labor market and financial stability. Members of the committee stated that these developments could also significantly impact the US economy. They also pointed out that households are experiencing a financial strain due to high inflation.

As stated in the minutes, inflation was still running above the committee's target. It noted that various factors such as food and energy costs rose faster than expected.

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"Participants observed that inflation continued to run well above the Committee's longer-run goal and that inflation pressures were evident in a broad array of goods and services," the minutes stated.

Tackling inflation

Many participants concluded that the rising prices had caused hardships for American families. They also said that it had made it harder for businesses to make their investment and production plans. Despite the high inflation, the Fed stated that the US economy was still strong. It also added that the labor market was still tight.

Most participants agreed that the central bank should increase its key interest rate by 50 basis points at its next meeting. They also supported the central bank's efforts to reduce its balance sheet.

The Fed has already started to reduce its balance sheet by $47.5 billion per month. It plans to increase the pace of its asset purchases in September to around $95 billion.

The committee aims to maintain a smooth transition as it gradually reduces its balance sheet. Once the balance sheet runoff has ceased, the reserve balances would gradually decline. However, they noted that the committee still expected that the reserve balances would remain at an adequate level.

"Once balance sheet runoff has ceased, reserve balances will likely continue to decline for a time, reflecting growth in other Federal Reserve liabilities, until the Committee judges that reserve balances are at an ample level," the minutes read.

After the meeting minutes were released, the US stock market rose. Investors were encouraged by the Fed's decision to maintain its cautious stance regarding the timing of the next rate hike.

The dollar was mixed against other currencies. The US Dollar Index, which measures the strength of the US dollar against a basket of currencies, was up by 0.27 percent at 102.14. On the other hand, the Treasury market was mixed. The 10-year yield was down by 1.5 basis points at 2.745 percent.