The Fed raised rates, but can it catch up with inflation?

New York (CNN Business)The Federal Reserve is ready to raise interest rates at a faster pace to get a handle on America’s pervasive inflation problem, according to minutes from the central bank’s March meeting released Wednesday.

The minutes said “many participants” at the Fed’s meeting in March noted they would have preferred a 50 basis point increase to the federal funds rate in light of high inflation.
Instead the Fed raised the benchmark rate by 25 basis points to a range of 0.25%-0.5% last month, its first interest rate increase since 2018. Only St Louis Fed President James Bullard was in favor of a 50 basis point increase at the March meeting.

    The rate hike came after the Fed announced the wind-down of its pandemic stimulus late last year.

      Between a strong US labor market, which has seen the unemployment rate fall to a new pandemic-era low of 3.6%, and inflation climbing to a 40-year high, the Fed needs to “move expeditiously,” Fed Chairman Jerome Powell said during a conference last month.

      The central bankers are also cautious about any further price increases due to Russia’s invasion of Ukraine. “By leading to higher energy and food prices, weighing on consumer sentiment, and contributing to tighter financial conditions, the invasion also negatively affected the growth outlook,” the minutes said.
      Following the more moderate rate increase in March, expectations for a steeper hike at the May meeting have risen. According to the CME’s FedWatch Tool, market expectations for a 50 basis point increase are above 75%. Expectations inched higher still after the minutes were released Wednesday.

        Other central bank officials have also said they would be open to raising interest rates faster since the initial increase last month, including Philadelphia Fed President Patrick Harker.
        The Fed said it is also getting ready to shrink down its massive balance sheet, which got bloated during the pandemic stimulus program. The Fed could reduce its Treasury and mortgage-backed security holdings by as much as $95 billion per month starting in May, a faster pace than in previous tightening cycles.
        Wall Street was displeased to hear the Fed’s increasingly worried tone about inflation. Investors sold off stocks, with the Dow (INDU) falling 200 points, or 0.6%. The broader S&P 500 (SPX) fell 1% and the Nasdaq Composite (COMP) tumbled 2.1%.
        Bond rates continued to surge with the expectation that rates would rise quickly. The 10-year Treasury yield rose to 2.62%, hitting a three-year high.

          Former Fed President Bill Dudley said in a Bloomberg op-ed Wednesday morning that a down market is a necessary byproduct of lowering inflation. “One thing is certain: To be effective, [the Fed] will have to inflict more losses on stock and bond investors than it has so far,” Dudley said.
          –CNN Business’ Dave Goldman and Nicole Goodkind contributed to this report.
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