Federal Reserve officials were divided on where to go with interest rates at their latest meeting, with some members seeing the need for more hikes while others expected growth to slow to eliminate the need for further tightening, minutes released Wednesday showed.
Although the decision raise the Fed’s benchmark rate by a quarter of a percentage point was unanimous, the summary of the session reflected disagreement over what the next step should be, with a preference for a less aggressive policy.
Ultimately, the Federal Open Market Committee, which sets rates, voted to remove a key phrase from its statement after the meeting that suggested “additional policy tightening may be appropriate.”
The Fed now appears to be moving to a more data-driven approach in which a myriad of factors will determine whether the rate hike cycle continues.
“Participants generally expressed uncertainty about how much further policy tightening would be appropriate,” the minutes said. “Many participants focused on the need to retain electability after this meeting.”
The debate essentially boiled down to two scenarios.
One, advocated by “some” members, concluded that progress in reducing inflation was “unacceptably slow” and would require further increases. The second, supported by “several” FOMC members, noted a slowdown in economic growth in which “further policy tightening may not be necessary after this meeting.”
The notation does not identify individual members or quantify “some” or “several” with specific numbers. However, in Fed parlance, “some” is considered more than “a few.” The minutes noted that members agreed that inflation was “substantially elevated” relative to the central bank’s target.
“Carefully monitor incoming information”
While future expectations have varied, there seems to be a strong consensus that the path the Fed has taken to raise rates 10 times since March 2022 to a total of 5 percentage points is no longer so certain.
“In light of the significant risks to the Committee’s objectives of maximum employment and price stability, participants generally noted the importance of closely monitoring incoming information and its implications for the economic outlook,” the document said.
FOMC officials also spent some time discussing the problems in the banking sector, which led to the closure of several medium-sized institutions. The minutes noted that members are ready to use their tools to ensure that the financial system has enough liquidity to meet its needs.
At the March meeting, Fed economists noted that the expected credit contraction due to banking pressures is likely to push the economy into recession.
They reiterated that claim at the May meeting, saying the decline could begin in the fourth quarter. They noted that if the credit crunch eased, it would pose a pro-inflationary risk to economic growth. The note noted that the scenario for less impact on banking is “considered to be only slightly less likely than the baseline scenario”.
The minutes also reflect some discussion of talks about raising the national debt ceiling.
“Many participants mentioned the need for the debt limit to be raised in a timely manner to avoid the risk of serious adverse dislocations in the financial system and the wider economy,” the summary said.
May market betting was the latest increase
The release of the minutes comes amid mixed public statements from officials about where the Fed should go from here.
Markets expect the May rate hike to be the last in the cycle and that the Fed could cut rates by about a quarter of a percentage point by the end of the year, according to futures prices. That expectation comes with the assumption that the economy will slow and possibly tip into recession while inflation falls closer to the Fed’s 2% target.
However, virtually all officials expressed skepticism, if not outright denial, about the likelihood of cuts this year.
Governor Christopher Waller recently said in a speech on Wednesday that while the data did not provide a clear case for a rate decision in June, he was inclined to believe that more hikes would be needed to reduce stubbornly high inflation.
“I don’t expect the data coming in over the next few months to make it clear that we’ve reached a terminal rate,” Waller said, referring to the end point for hiking. “And I’m not in favor of stopping rate hikes unless we get clear evidence that inflation is coming down toward our 2% target. But whether we should hike or skip at the June meeting will depend on how the data comes in over the next three weeks.” “
Chairman Jerome Powell weighed in last week and gave little indication he was considering a rate cut, though he said banking problems could negate the need for a hike.
Economic reports showed that inflation is falling, although it remains well above the central bank’s targets. Core inflation as measured by the Fed’s preferred index of personal consumption expenditures excluding food and energy increased by 4.6% year-on-year in March, a level at which it has been moving for several months.
A busy labor market is keeping pressure on prices with a 3.4% unemployment rate matching lows from the 1950s. Wages are also rising, up 4.4% from a year earlier in April, and a research note from former Fed chairman Ben Bernanke this week said the trend represents the next stage in the fight against inflation for his former colleagues.
On the broader economy, S&P Global’s purchasing managers’ index hit a 13-month high in May, suggesting that while a recession could be the story later in the year, there are few signs of abating now. The Atlanta Fed’s economic data tracker GDPNow shows annual growth at a 2.9% pace in the second quarter.
Correction: In the language of the Fed, “some” is considered more than “several”. An older version misstated the difference.