Federal Reserve officials were divided at their last meeting as to whether or not another rate hike was needed to slow the economy, according to minutes from the central bank’s May policymaking meeting, released Wednesday afternoon.
The decision was ultimately unanimous, but officials seem to be moving further apart. For now, they agree only that additional rate hikes are still on the table.
“Some participants stressed that it was crucial to communicate that the language in the postmeeting statement should not be interpreted as signaling either that decreases in the target range are likely this year or that further increases in the target range had been ruled out,” the minutes showed.
The debate is centered on concerns over inflation not cooling fast enough and the labor market’s persistent strength. Fed economists’ forecast of core inflation “was revised up a little, relative to the previous projection.” And former Fed chair Ben Bernanke argued in a new study released this week that the job market has played an increasing role in driving inflation, requiring an economic downturn to be addressed.
“The hawks were still in charge in early May,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in an analyst note. “But the next round of CPI, PPI, and labor market data likely will strengthen the case for a June pause.”
The Fed won’t consider suspending rate hikes until it sees a broad softening of the labor market, Shepherdson said.
The Fed’s economists also reaffirmed their forecast of a mild recession later in the year.
Officials also addressed the possibility of a US default during their meeting, and have continued to express those concerns in public engagements since then.
“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 minutes said.
Officials voted at the May meeting to raise the central bank’s benchmark lending rate by a quarter point to a range of 5-5.25%, the 10th rate hike in a row, while signaling a potential future pause in rate increases. Fed Chair Jerome Powell said in his news conference following the decision that support for the most recent rate hike was “very strong across the board,” but that there was some discussion about eventually suspending rate increases.
“People did talk about pausing, but not so much at this meeting. There’s a sense that we’re much closer to the end of this than to the beginning,” Powell said at his press conference. “If you add up all the tightening that’s going on through various channels, we feel like we’re getting close or maybe even there, but again that is going to be an ongoing assessment.”
The debate whether the Fed should hike rates again or pause in June has intensified in recent weeks, mostly because of concerns that inflation isn’t cooling fast enough.
St. Louis Fed President James Bullard, who favors an aggressive approach to combating inflation, said Monday that the Fed may have to raise rates two more times. Neel Kashkari of the Minneapolis Fed said a June pause is still on the table, but that the central bank could resume rate increases if needed.
“I think right now it’s a close call, either way, versus raising another time in June or skipping. What’s important to me is not signaling that we’re done,” Kashkari told CNBC in an interview this week.
Some Fed officials have said they are wary of other factors also weighing on the economy, such as tougher lending standards and the delayed effects of tighter monetary policy, hinting that a pause could be a more prudent option. San Francisco Fed President Mary Daly said during a conference on Monday that the Fed committee that decides interest rates should “be extremely mindful that that built up slowing is already in the chain [and] could start to show through at any point in time.”
“And when you add the credit tightening that we’ve been seeing to that, it means that there’s a lot of factors pulling back the reins on the economy and that’s why we have to be so critically data dependent, because if we think it’s not here yet and then we tighten too much, we can easily create an unforced error where we’ve over tightened,” said Daly, who isn’t a voting member this year.
Officials also speculated over the possibility that those factors could have an even greater impact on the economy than anticipated.
“In discussing sources of downside risk to economic activity, participants referenced the possibility that the cumulative tightening of monetary policy could affect economic activity more than expected, and that further strains in the banking sector could prove more substantial than anticipated,” according to the minutes.