US Federal Reserve minutes released this Wednesday showed officials split at their last meeting over how to continue with interest rates: some members saw the need for more increases while others expected a slowdown in growth to remove the need to tighten further.
Even when the decision to increase the Fed's benchmark rate by a quarter percentage point was unanimous, the May 2/3 meeting summary reflected disagreement over what the next move should be, with a tilt toward less aggressive policy.
At the end, the rate-setting Federal Open Market Committee voted to remove a key phrase from its post-meeting statement that had indicated “additional policy firming may be appropriate.”
The Fed appears now to be moving toward a more data-dependent approach in which myriad factors will determine if the rate-hiking cycle continues.
“Participants generally expressed uncertainty about how much more policy tightening may be appropriate,” the minutes said. “Many participants focused on the need to retain optionality after this meeting.”
Essentially, the debate came down to two scenarios.
One that was advocated by “some” members judged that progress in reducing inflation was “unacceptably slow” and would necessitate further hikes. The other, backed by “several” FOMC members, saw slowing economic growth in which “further policy firming after this meeting may not be necessary.”
The minutes do not identify individual members nor do they quantify “some” or “several” with specific numbers. However, in Fed jargon, “some” is thought to be more than “several.” The minutes noted that members concurred inflation is “substantially elevated” relative to the central bank’s goal.
While the future expectations differed, there appeared to be strong agreement that a path in which the Fed has hiked rates 10 times for a total of 5 percentage points since March 2022 is no longer as certain.
“In light of the prominent 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,” the document said.
FOMC officials also spent some time discussing the problems in the banking industry that have seen multiple medium-sized institutions shuttered. The minutes noted that members are at the ready to use their tools to make sure the financial system has enough liquidity to cover its needs.
At the March meeting, Fed economists had noted that the expected credit contraction from the banking stresses likely would tip the economy into recession.
They repeated that assertion at the May meeting and said the contraction could start in the fourth quarter. They noted that if the credit tightness abated that would be an upside risk for economic growth. The minutes noted that the scenario for less impact from banking is “viewed as only a little less likely than the baseline.”
The minutes also reflect some discussion on the talks to raise the national debt ceiling.
“Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy,” the summary stated”.