Fed officials concluded that the need for more rate hikes became “less certain” as economic risks increased, though the US central bank remained open to additional rate hikes if the data warranted, according to the narrative of their latest meeting.
Minutes of the May meeting, when the Federal Open Market Committee raised interest rates for the 10th consecutive time in just over a year, confirmed that the US central bank is considering whether to pause its aggressive monetary tightening campaign as it assesses how much pressure on the economy it needs to take hold. on inflation.
Citing both the “late effects” of monetary tightening that the Fed has already put into practice, as well as the specter of tougher credit conditions as a result of recent bank failures, “respondents generally agreed” that “the extent of further increases in the target range might be appropriate now that This meeting has become less certain.”
The quarter-point increase in May brought the federal funds rate to a new target range of 5 to 25.25 percent, the highest level since mid-2007. The rate is in line with the peak level that most officials projected when the projections were last issued in March.
The Fed said in March that additional interest rate increases “may be appropriate” to tame inflation. But in this month’s guidance, she said officials will consider incoming data and how much their increases have already affected the economy, as they decide how high rates need to go up.
Federal Reserve Chairman Jay Powell called the change “meaningful.” According to the minutes, many participants stressed the Fed’s need to “retain discretion after this meeting,” with some believing that further action would be warranted if inflation continues to slowly decelerate.
However, several officials emphasized that if the economic outlook develops as expected, no additional interest rate increases would be required.
Federal Reserve staffers still expect the economy to slip into a mild recession this year before recovering, and the minutes noted that nearly all officials saw greater prospects for lower growth and higher unemployment in the wake of recent bank failures.
However, the Fed confirmed that it does not plan to cut interest rates this year.
Since the May meeting, officials have engaged in a heated debate about whether a pause in increases next month would be justified.
Fed Governor Christopher Waller said on Wednesday that economic data has not yet provided “enough clarity” about what officials should do at the June policy meeting. He said the decision would likely come down to either raising the benchmark interest rate again or stopping for a meeting and considering an increase in July.
A number of policymakers, including Federal Reserve Bank of Dallas’ Lori Logan and Fed Governor Michael Bowman, seem to agree, arguing recently that the data did not show enough decline in inflation to pause. James Bullard, president of the Federal Reserve Bank of St. Louis, also told the Financial Times recently that higher interest rates will likely be needed as “insurance” against price pressures becomes more entrenched.
But Powell hinted last week that he was in favor of giving up another rate hike in June. Governor Philip Jefferson, who was recently chosen by the Biden administration to be the next vice chair of the Federal Reserve, stressed that the effects of the central bank’s efforts to slow the economy are “probably still ahead.”
Ahead of the two-day FOMC meeting, which begins on June 13, the Fed will receive more economic data including monthly jobs numbers as well as the latest reading on inflation.