Federal Reserve officials were “less certain” about the need for further rate hikes

Federal Reserve officials concluded that the need for further rate hikes is “less certain” as economic risks increase, although the US central bank remains open to further rate hikes if the data warrants, according to their latest meeting.

Minutes from the May meeting, when the Federal Open Market Committee made its tenth straight rate hike in just over a year, confirmed that the U.S. central bank is considering whether to end its aggressive monetary tightening campaign as it assesses how much more it needs to tighten the economy. to control inflation.

Referring to the “lagged effects” of the Fed’s previous interest rate hikes, as well as the specter of tightening credit conditions resulting from recent bank failures, the participants “generally agreed” on “the extent to which a further increase in the target range may be appropriate. after that encounter became less certain”.

The quarter-point increase in May raised the federal funds rate to a target range of 5-5.25 percent, the highest since mid-2007. The rate is in line with the peak level that most officials had forecast when forecasts were last published in March.

The Fed said in March that further rate hikes “may be appropriate” to curb inflation. But this month’s guidance said officials will take into account incoming data and how much its growth has already affected the economy when determining how much higher interest rates should be raised. Fed Chairman Jay Powell called the change “sensible.”

In the minutes, there were differences between the committee members regarding further interest rate increases. Many participants stressed that the minutes said the Fed should “maintain the option after this meeting,” and some said more action would be needed if inflation continued to slowly decelerate.

At the same time, several officials emphasized that if the economic outlook develops as expected, further interest rate hikes “will not be necessary”, the minutes state.

Fed staff continue to predict that the economy will slip into a mild recession this year before rebounding — even though there is a greater risk that inflation will remain stubborn for longer than expected. The minutes also indicated that almost all officials saw a higher chance of lower growth and higher unemployment after the recent bank failures.

Despite this, the Fed maintained that it does not plan to cut the key interest rate this year.

Since the meeting in May, the officials have been involved in a heated debate about whether it will be justified to pause next month’s interest rate hike.

Fed Governor Christopher Waller said on Wednesday that economic data did not yet provide “enough clarity” on what officials should do at the June policy meeting. He said the decision was likely to come down to either raising the key rate again or pausing a session to consider a July hike.

Several policymakers, including the Dallas Fed’s Lorie Logan and Fed Governor Michelle Bowman, agreed, arguing recently that the data did not show enough of a drop in inflation to warrant a 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 further price pressures.

But Powell hinted last week that he supports canceling another rate hike in June. Governor Philip Jefferson, who was recently tapped by the Biden administration to be the Fed’s next vice chairman, also stressed that the effects of the central bank’s efforts to slow the economy are “probably still ahead.”

Ahead of the next two-day FOMC meeting, which begins on June 13, the Fed will receive more economic data, including monthly jobs data and the latest information on inflation. According to the minutes, officials said they will also closely monitor how banking stress affects business activity and inflation.

Officials also discussed the consequences if Congress did not raise the debt ceiling before the government ran out of cash. Some warned of “significant disruptions to the financial system and financial conditions weakening the economy.”