Federal Reserve officials concluded the need to further lift interest rates had become “less certain” as economic risks had increased, although the US central bank remained open to additional rate rises if warranted by the data, according to an account of their latest meeting.
Minutes from the May meeting, when the Federal Open Market Committee delivered its 10th consecutive rate rise in just over a year, confirmed that the US central bank is considering whether to pause to its aggressive monetary tightening campaign as it assesses how much more it needs to squeeze the economy to control inflation.
Citing both the “lagged effects” of the Fed’s previous rate rises, as well as the spectre of tighter credit conditions stemming from the recent bank failures, participants “generally agreed” that “the extent to which additional increases in the target range may be appropriate after this meeting had become less certain”.
The quarter-point increase in May lifted the federal funds rate to a target range of 5-5.25 per cent, the highest since mid-2007. The rate is in line with the peak level most officials forecast when projections were last released in March.
The Fed said in March that additional rate rises “may be appropriate” to tame inflation. But in guidance this month it said officials would take into account incoming data and how much its increases had already affected the economy as they determined how much higher rates would have to rise. Fed chair Jay Powell described that change as “meaningful”.
The minutes showed differences among committee members over further rate increases. Many participants stressed the need for the Fed to “retain optionality after this meeting”, with some believing further action would be warranted if inflation continued to decelerate slowly, according to the minutes.
Several officials, however, emphasised that if the economic outlook evolved as expected, additional rate rises “may not be necessary”, the minutes said.
Staffers at the Fed continue to predict the economy will tip into a mild recession this year before staging a recovery — even as they saw a greater risk that inflation would remain stubbornly high for longer than expected. The minutes also indicated that almost all officials saw greater odds of lower growth and higher unemployment in the aftermath of the recent bank failures.
Still, the Fed has maintained it does not plan to cut its policy rate this year.
Since the May meeting, officials have been locked in an intense debate about whether pausing rate rises next month will be warranted.
Christopher Waller, a Fed governor, on Wednesday said that economic data had not yet provided “sufficient clarity” about what officials should do at June’s policy meeting. He said the decision was likely to come down to either raising the benchmark policy rate again or pausing for a meeting and considering an increase in July.
A number of policymakers, including Lorie Logan of the Dallas Fed and Fed governor Michelle Bowman, appear to agree, recently arguing that the data did not show enough of a decline in inflation to hit pause. James Bullard, president of the St Louis Fed, also told the Financial Times recently that higher interest rates are likely to be needed as “insurance” against price pressures becoming further entrenched.
But Powell last week hinted that he supports forgoing another rate rise in June. Governor Philip Jefferson, who was recently tapped by the Biden administration to serve as the Fed’s next vice-chair, has also emphasised that the effects of the central bank’s efforts to slow the economy were “still likely ahead of us”.
Before the next two-day FOMC meeting, which begins on June 13, the Fed will receive even more economic data including monthly jobs figures as well as the latest read on inflation. According to the minutes, officials said they would also be closely monitoring how banking stress would affect business activity and inflation.
Officials also discussed the potential fallout from a failure by Congress to raise the debt ceiling before the government ran out of cash. Some warned of “significant disruptions to the financial system and tighter financial conditions that weaken the economy”.
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