Outline of the Fed minutes… The FOMC minutes showed the most hawkish Fed tightening cycle since 1994, agreeing on a $95 billion balance sheet reduction. The minutes revealed that Fed officials "generally agreed" last month to cut $60 billion a month from the U.S. central bank in Treasury bonds and $35 billion in mortgage-backed securities. These amounts have been phased out for a three-month “or slightly longer” period, and increasing the cap will be subject to consideration during these timeframes. Immediately after the conclusion of the 3-4 May policy meeting, "the process of reducing the size of the balance sheet may begin". In addition, many Fed officials announced that 1 or more 50 basis points increase could be guaranteed to reduce the inflation rate.
Recession and inflation… Recently, there have been signals that the possibility of a global recession is getting stronger. On the other hand, the expected rate hikes within the scope of the fight against inflation… It is a matter of curiosity how the central banks, especially the FED and ECB, will act in the grip of recession and inflation. The main issue is: Will they still want to raise interest rates despite the risk of recession? The hawkish tone of the Fed is of course important, but it should be underlined that raising interest rates alone will not catch inflation. So even though the federal funding rate is 2.5% today, it's in deep negative territory below consumer-based inflation. The negative real interest rates in the US make one believe that the Fed has more room to move on to increase interest rates that do not harm the economy.
1970 – 1989 Fed federal funding rate vs. CPI and GDP... Source. Bloomberg
Conclusion? In the chart, you can see the Volcker period Fed rates in the 1970s and 80s inflation cycle and its effects on inflation and GDP growth. It's unclear whether Powell is a Volcker yet. Currently, the United States is experiencing the most severe inflation in the last 40 years. The most fundamental struggle with this lies in monetary policy and the control of the money supply. If supply shortages aren't the only source of inflation, we might worry that it will bring such a drastic policy turnaround from the highest inflation since 1982. In an inflationary situation that erodes income and otherwise shapes consumer and market behavior in the long run, a perspective will be set accordingly. If a stricter policy is needed, the Fed appears to implement it.
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