Minutes show Fed officials split on whether to pause rate hikes in June

Minutes of the May 2-3 meeting released on Wednesday showed that Federal Reserve officials unanimously agreed to raise interest rates at their May meeting, but policymakers were divided on whether further rate hikes were necessary.

The minutes showed that Fed officials were divided on the future path of interest rates at their last meeting, with "several participants" noting that if the economy develops in line with their current outlook, then further tightening of policy might not be necessary after this meeting, but some officials still believed that "further tightening of policy might be required at future meetings" because progress in returning inflation to the central bank's 2% target might continue to be "unacceptably slow."

Bitpush previously reported that the Federal Reserve raised its benchmark federal funds rate by 25 basis points to a range of 5% to 5.25% at its May meeting, marking the 10th consecutive rate hike since March 2022 to combat high inflation.

There are differences in the path of rate hikes

In the past two weeks, some Fed officials have said inflation and economic activity aren’t slowing enough to justify an end to rate hikes.

“As policy becomes more stringent, the risks of doing too much versus doing too little become more balanced,” Powell said at a conference hosted by the central bank last week.

The minutes showed Fed staff continued to expect a recession to begin around the fourth quarter of this year as the lagged effects of rate hikes and banking sector stress slowed economic activity.

Federal Reserve Governor Christopher Waller told the Wall Street Journal at a conference in Santa Barbara, California, this week that it is a toss-up as to whether the central bank should raise rates in June or wait until its late July meeting.

"We need to remain flexible until the best decision is made in June," Waller said.

Waller said that based on current economic activity data, the Fed has not made much progress on inflation. He expects economic and lending activity data over the next two months to make it clear that interest rates still need to be above current levels. If the upcoming data do not show further signs that economic activity and inflation are slowing, then a rate hike in June would be appropriate.

Another rate hike would bring the federal funds rate to a 22-year high.

At the same time, Waller also mentioned that even if current and upcoming data support a rate hike next month, caution may be necessary due to increased uncertainty about how bank funding costs will rise since the collapse of three mid-sized banks since March.

"Another rate hike combined with a sudden and unexpected tightening of credit conditions could quickly push the economy down in an unwelcome way," Waller said. "If people are sufficiently concerned about this downside risk, then prudent risk management would suggest not raising rates at the June meeting, but instead leaning toward a July rate hike based on incoming inflation data." If credit and banking conditions persist into July, then a further rate hike at the central bank's subsequent meeting in late July "would likely be appropriate policy."

Minneapolis Federal Reserve Bank President Neel Kashkari said in an interview with The Wall Street Journal last week that he might support keeping interest rates unchanged at the June 13-14 meeting to give policymakers more time to assess how the economy is developing.

Markets bet May will be the last rate hike

Futures market pricing is pricing in May’s rate hike as the last in this cycle, with the Fed likely to cut rates by about a quarter percentage point by the end of the year. That expectation comes with the assumption that the economy will slow and possibly fall into recession, while inflation will fall back closer to the Fed’s 2% target.

Economic data showed inflation was trending lower, although it remains well above the central bank’s target. Core inflation, measured by the Fed’s preferred personal consumption expenditures index excluding food and energy, rose 4.6% year-on-year in March, a level it has hovered around for months.

A busy labor market has been weighing on prices, with the 3.4% unemployment rate the lowest since the 1950s. Wages have also been rising, up 4.4% from April a year ago, a trend that a research note from former Federal Reserve Chairman Ben Bernanke this week said represented the next phase of his former colleagues’ fight against inflation.

The U.S. central bank’s next move remains uncertain, with policymakers continuing to keep their options open ahead of its June meeting. On Friday, the Commerce Department will release updated data on its personal consumption expenditures index, the Fed’s preferred inflation measure. Early next month, the federal government will also release new data on job growth in May.