Minutes of the meeting released on Wednesday showed that Fed officials were divided on the direction of interest rates at the last meeting, with some members believing that further rate hikes were necessary, while others expected that the slowdown in economic growth would eliminate the need for further tightening.
Although the decision Raise the Fed’s benchmark interest rate Twenty-five points were unanimous, with the meeting summary reflecting a split on what action should be taken next, favoring a less aggressive policy.
Finally, the rate-setting FOMC voted to remove a keyword from their post-meeting statement that suggested “additional policy tightening may be appropriate.”
The Fed now appears to be shifting to a more data-dependent approach, where a myriad of factors will determine whether the rate hike cycle continues.
“Participants generally expressed uncertainty about the appropriate degree of policy tightening,” the minutes said. “Many participants emphasized after this meeting the need to retain selectivity.”
Essentially, the debate boils down to two scenarios.
One view, promoted by “some” members, was that progress in reducing inflation was “unacceptably slow” and that further rate hikes were needed. The other, backed by “several” FOMC members, argued that economic growth was slowing and that “further tightening may not be warranted after this meeting.”
The minutes did not identify individual members, nor did they quantify “some” or “a few” with specific numbers. However, according to the Fed, “several” is considered more than “some”. The minutes noted that members agreed that inflation was “substantially elevated” relative to the Fed’s target.
“closely monitor incoming information”
While expectations for the future vary, there seems to be consensus that the path for the Fed to hike rates 10 times since March 2022, for a total of 5 percentage points, is less certain.
“Given the prominent risks to the Committee’s objectives of maximum employment and price stability, participants generally noted the importance of paying close attention to incoming information and its implications for the economic outlook,” the document said.
FOMC officials also spent some time discussing problems in the banking sector that have led to the failure of several mid-sized institutions. The minutes noted that members were ready to use their tools to ensure there was sufficient liquidity in the financial system to meet their needs.
At the March meeting, Fed economists noted that an expected credit contraction due to stress in the banking sector could tip the economy into recession.
They reiterated that thesis at their May meeting, though they noted that should the credit crunch ease, that would pose an upside risk to growth. The minutes noted that the scenario with less impact on the banking sector was “considered only slightly less likely than the baseline”.
Markets bet May is last rate hike
The release of the minutes comes as officials have made mixed public statements about where the Fed should go.
The May rate hike is expected to be the last of the cycle, with the Fed likely to cut rates by about 25 percentage points by the end of the year, according to futures market pricing. That expectation is accompanied by assumptions that the economy will slow and possibly fall into recession, while inflation will fall closer to the Fed’s 2% target.
Almost all officials, however, have expressed doubts, if not outright dismissiveness, about the possibility of a rate cut this year.
More recently, Governor Christopher Waller said in a speech on Wednesday that while the data provided no clear rationale for a June rate decision, he was inclined to think that more rate hikes would be needed to bring down stubbornly high inflation.
“I don’t expect the data in the next few months to clearly indicate that we have reached a final rate,” Waller said, referring to the end point for rate hikes. “And I’m not in favor of pausing rate hikes unless we get clear evidence that inflation is coming down towards our 2% objective. But whether we should raise rates or not at the June meeting will depend on what happens in the next three weeks.” data. “
Fed Chairman Jerome Powell spoke last week and gave little sign he was considering a rate cut, although he said banking problems could negate the need for a rate hike.
Economic reports have shown that while inflation remains well above the central bank’s target, it is trending lower. Core inflation, as measured by the Fed’s preferred index of personal consumption expenditures, rose 4.6% in March from a year earlier, a level that has hovered for months.
A busy labor market has been putting pressure on prices, with the unemployment rate at 3.4%, the lowest since the 1950s. Wages have also been rising, up 4.4 percent from April a year ago, a trend this week that former Federal Reserve Chairman Ben Bernanke said represented the next phase of economic growth by his former colleagues. Inflation struggles.
As for the broader economy, the S&P Global Purchasing Managers’ Index hit a 13-month high in May, suggesting that while a recession could loom later in the year, there is little sign of contraction for now. The Atlanta Fed’s GDPNow economic data tracker showed growth at an annualized rate of 2.9% in the second quarter.