The Federal Reserve's policymakers judged that an increase of 50 or 75 basis points "would likely be appropriate at the next meeting," according to the minutes of the Federal Open Market Committee's June 14-15 meeting.
They also "recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures" persisted.
At the same time, they were aware that the rate hikes could "slow the pace of economic growth for a time," according to the minutes. However, they saw the return of inflation to 2% as "critical for achieving maximum employment on a sustained basis."
After the release of the minutes, the three major U.S. stock averages initially dropped then rebounded into the green, with the Nasdaq +0.1%, S&P 500 +0.2%, and the Dow +0.1% at 2:32 PM ET; 10-year Treasury yield is at 2.92%, higher than 2.90% before the release. 2-year UST yield of 2.95% rose from 2.91% before the announcement, showing that the 2s-10s yield curve remains inverted. Meanwhile, the 30-year UST yield at 3.12% was little changed from before the minutes.
With the potential for the firmer policy to slow the economy, the Fed officials removed language from the June policy statement that "indicated an expectation that appropriate policy would result in a return of inflation to 2% and a strong labor market."
Another change that the FOMC members agreed to make to their policy statement was omitting the sentence about high uncertainty regarding the Ukraine-Russia conflict's implications on the U.S. economy.
The Fed officials also agreed that COVID-related lockdowns in China were likely to exacerbate supply chain disruptions.
Regarding the central bank's moves to shrink its balance sheet, a strategy known as quantitative tightening, the Fed's staff projected that its System Open Market Account net income would decline or potentially turn negative as the increased rate target range lifts the interest expense on some liabilities, "and that this eventually could result in a deferred asset entry" on the Fed's balance sheet. Neither unrealized losses on its existing securities portfolio or negative net income would result in changes to the central bank's monetary policy implementation, the minutes said.
At 2:39 PM ET, the CME FedWatch tool had a 90.3% probability of a 75-bp rate hike at the July FOMC meeting, up from an 83.8% probability a day earlier. There's no probability assigned for a 100-bp increase.
Recall that Fed raised its policy rate by 75 basis points to 1.50%-1.75%, the biggest increase since 1994, in its bid to rein in inflation.
As of July 1, the Atlanta Fed's GDPNow model estimate Q2 GDP at -2.1%, a downward revision from -1.0% on June 30.