Federal Reserve officials were divided at their last meeting on the direction to take with interest rates, with some members seeing the need for further increases while others expected slower growth to suppress the need to tighten further, according to minutes released Wednesday.
Although the decision to raise the Fed’s benchmark rate by a quarter of a percentage point was unanimous, the meeting summary reflected disagreement on what the next move should be, with a tilt toward policy less aggressive.
In the end, the Federal Open Market Committee responsible for setting rates voted to remove a key phrase from its post-meeting statement that had indicated that “further policy tightening may be appropriate.”
The Fed now appears to be moving towards a more data-driven approach in which a myriad of factors will determine whether the rate hike cycle continues.
“Participants generally expressed uncertainty about the extent to which further policy tightening might be appropriate,” the minutes read. “Many participants focused on the need to retain optionality after this meeting.”
Essentially, the debate boiled down to two scenarios.
One, championed by “some” members, said progress in reducing inflation was “unacceptably slow” and would require further hikes. The other, backed by “several” FOMC members, saw a slowdown in economic growth in which “additional policy firming after this meeting may not be necessary.”
Minutes do not identify individual members or quantify “some” or “many” with specific numbers. However, in Fed parlance, “many” is considered more than “some”. The minutes noted that members agreed that inflation was “substantially high” relative to the Fed’s target.
While future expectations differed, there seemed to be strong agreement that a trajectory in which the Fed has raised rates 10 times for a total of 5 percentage points since March 2022 is no longer so certain.
“Given the significant risks to the Committee’s objectives with respect to both maximum employment and price stability, participants generally noted the importance of closely monitoring incoming information and its implications for the economic outlook. “, says the document.
FOMC officials also spent time discussing banking sector issues that have seen several mid-sized institutions shut down. The minutes note that the members are ready to use their tools to ensure that the financial system has enough liquidity to cover its needs.
At the March meeting, Fed economists noted that the expected contraction in credit due to banking strains would likely tip the economy into recession.
They repeated that assertion at the May meeting, while noting that if the credit crunch eased, it would pose an upside risk to economic growth. The minutes noted that the scenario of a lesser impact from banking services is “considered only slightly less likely than the baseline scenario.”
The release of the minutes comes amid disparate public statements from officials about where the Fed should go from here.
Markets expect May’s rate hike to be the last of this cycle and the Fed to cut rates by about a quarter of a percentage point before the end of the year, according to prices. of the futures market. This expectation comes with the assumption that the economy will slow down and possibly tip into recession as inflation approaches the Fed’s 2% target.
However, virtually all officials expressed skepticism, if not disdain, about the likelihood of a reduction this year.
More recently, Gov. Christopher Waller said in a speech Wednesday that while the data didn’t make a clear case for June’s rate decision, he’s inclined to think more hikes will be needed to bring down stubbornly high inflation.
“I don’t expect the data coming in over the next couple of months to be a clear indication that we’ve reached the terminal rate,” Waller said, referring to the end point of the hike. “And I don’t support stopping rate hikes unless we get clear evidence that inflation is falling towards our 2% target. But if we have to hike or jump at the June meeting, that will depend on how the data comes in over the next three weeks.”
Chairman Jerome Powell weighed in last week, providing little indication he was considering rate cuts, although he said banking problems could negate the need for increases.
Economic reports showed that inflation is falling although it remains well above central bank targets. Core inflation, as measured by the Fed’s preferred personal consumption expenditure index, rose 4.6% on an annual basis in March, a level around which it has hovered for months.
A buoyant labor market kept prices under pressure, with an unemployment rate of 3.4% hitting a low dating back to the 1950s. Wages also rose, up 4.4% from a year ago. April turned one year old, and a research paper released this week by former Fed Chairman Ben Bernanke said the trend represented the next phase in the fight against inflation for his former colleagues.
Looking at the broader economy, S&P Global’s Purchasing Managers’ Indexes hit a 13-month high in May, indicating that while the recession could be history later in the year, there is few signs of contraction now. The Atlanta Fed’s economic data tracker GDPNow shows growth at an annualized rate of 2.9% in the second quarter.