The minutes of the last central bank meeting highlighted the divergent views of Federal Reserve officials on the course of monetary policy. There were two camps. On the one hand, officials who insist on the continuation of the cycle of increases and on the other those who express the opinion that the slowdown in growth will remove the need for further tightening. Participants generally expressed uncertainty about the extent to which further policy tightening might be appropriate.
Although the decision to raise the Fed’s benchmark interest rate by 25 basis points was unanimous, the summary of the meeting reflected disagreement on what the next step should be, with the balance tilting more towards a policy less aggressive.
We have published the minutes of the #FOMC meeting held May 2-3, 2023: https://t.co/e2F1b549RX
— Federal Reserve (@federalreserve) May 24, 2023
Several argued that the quarter-percentage-point increase they approved could be the last, according to the minutes of the May 2-3 meeting. But others warned that the US central bank should keep its options open given the risks of lingering inflation. Against this backdrop, today’s statements from Fed hawk Christopher Waller, who argued that inflationary pressures are lingering, warned that even if the Fed keeps interest rates unchanged at its next meeting, it is unlikely to end the cycle of rising interest rates.
In the end, the Federal Open Market Committee (FOMC) responsible for setting rates voted to remove the key phrase from its post-meeting statement: “further policy tightening may be appropriate.”
The Fed now appears to be moving towards a more data-driven approach, with many factors determining whether the rate hike cycle will continue. The central bank shifted to a one-meeting approach after raising rates in May, possibly postponing rate hikes for at least some time to allow the economy and financial system to fully adjust to the sharp increases in borrowing costs over the past 14 months .
“Several panelists noted that if the economy develops in line with their current outlook, further policy tightening after this meeting may not be necessary,” the minutes read, adding to expectations that the Fed should end to the aggressive rate hike campaign at its next meeting on June 13-14.
As Fed staff continue to forecast a mild recession later this year, some policymakers “saw signs that last year’s tightening was starting to have the impact they had hoped for,” with “nearly all participants” seeing risks to growth due to the tightening of bank credit.
“Participants generally expressed uncertainty about the extent to which further policy tightening might be appropriate,” the minutes read. “A lot of them were focused on the need to maintain optionality after this meeting.”
The two scenarios
Essentially, the discussion focused on two scenarios.
One, backed by “some” members, said progress in reducing inflation was “unacceptably slow” and needed further increases. The other, backed by “several” FOMC members, saw a slowdown in economic growth in which “further policy tightening after this meeting may not be necessary.”
It should be noted that in the minutes the designations of individual members, “a few” or “several” are not identified by numbers. However, in the “hieroglyphics” of the Fed, “many” is considered more than “some”. The minutes note that members agree that inflation is “significantly high” relative to the Fed’s target.
While forward expectations varied, there seemed to be broad agreement that the trajectory in which the Fed has raised interest rates 10 times for a total of 5 percentage points since March 2022 is no longer so. certain.
“In light of the clear risks to the Commission’s objectives of maximum employment and price stability, participants generally noted the importance of closely monitoring incoming information and its implications for the economic outlook,” says the verbal procedure.
The banking sector at the table
Officials also spent a lot of time discussing banking sector problems that led to the closure of regional banks. The minutes note that members are ready to use their tools to ensure that the financial system has enough liquidity to meet its needs.
At the March meeting, Fed economists noted that the expected contraction in credit due to banking stress would likely tip the economy into recession. They reiterated that assertion at the May meeting, although they noted that if the credit crunch were to ease, it would pose an upside risk to economic growth. The minutes note that the scenario of a lesser impact from the banking sector “is only considered slightly less likely than the baseline scenario.”
New forecasts will be released at the end of next month’s meeting, but the latest data is unclear where and how fast the Fed’s inflation battle will head. The pace of price growth is slowing, but only moderately, and the economy remains stronger than expected in key areas, especially job and wage growth.
However, there are signs that the economy is slowing and growing pressures on the financial system have raised fears of a credit crunch for businesses and households.