Federal Reserve officials struck a tenuous agreement to pause interest-rate increases at their June meeting, all but committing to hike again later this month in a bid to keep fighting stubborn inflation.
(Bloomberg) — Federal Reserve officials struck a tenuous agreement to pause interest-rate increases at their June meeting, all but committing to hike again later this month in a bid to keep fighting stubborn inflation.
The minutes from the Fed’s June 13-14 meeting show that while almost all officials deemed it “appropriate or acceptable” to keep rates unchanged in a 5% to 5.25% target range, some would have supported a quarter-point increase instead.
“It was a little surprising given that the decision was sold as unanimous from Fed officials,” said Lindsey Piegza, chief economist at Stifel Nicolaus & Co. “It’s pretty clear that there was a divergence of opinions, with some officials pretty clearly giving some reluctance for a one-month pause.”
The minutes also showed that a large majority of policymakers — “almost all” — agreed that more tightening will likely be needed this year. That, coupled with a reference to the importance of post-meeting communication to clarify officials’ intentions, provided ample evidence that the Fed likely isn’t done.
The readout paints a picture of an increasingly divided committee trying to navigate the pace and intensity of policy moves as rates are now in a range most economists see as restrictive. Going into the meeting, a sizable minority of policymakers had warned inflation was not falling as quickly as they expected and voiced support for more action.
Strong Majority
Chair Jerome Powell has repeatedly emphasized the decision was unanimous in several public appearances following the meeting, and has said that most officials see at least two more increases as necessary, if not more.
“A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year,” Powell said at a conference in Madrid hosted by the Bank of Spain last week. “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
Read More: Powell Signals Fed Open to Two Straight Hikes at Coming Meetings
Powell’s messaging has helped narrow the gap between Fed officials’ estimates — which call for two more rate increases this year — and market expectations of tightening. Investors now put the odds of a July hike at 85%, compared with 62% right after the June meeting.
But some at the Fed have expressed more reticence about how much more tightening is needed.
“There is time for us to wait and let our policy work,” Atlanta Fed President Raphael Bostic, who doesn’t vote on policy this year, said last week in Dublin. “I don’t see as much urgency to move as others, including my chair.”
Stubborn Inflation
Officials supporting a hike in June cited tight labor markets and relatively few signs that inflation was slowing toward their 2% goal, according to the minutes. Some policymakers have expressed concern that core inflation, in particular, hasn’t budged much in the last six months.
The personal consumption expenditures index, less food and energy, rose at a 4.6% annual pace in May, a report showed last week, virtually unchanged since the beginning of the year.
The Fed’s decision last month was the latest slowdown in policy after officials lifted rates at the fastest clip in four decades last year, including four consecutive 75 basis-point hikes. They started reducing that speed in December and delivered quarter-point increases at each of the first three meetings this year.
Officials have said the rapid rise in interest rates since early 2022 allows them room now to assess how that tightening is affecting the economy, and to watch for signs of economic spillovers from the March banking turmoil.
Most officials have pointed to the resilience of the US economy as an overall positive feature that has so far kept a recession at bay. But that underlying strength — such as the persistently strong labor market — have also prompted concern about how much time it will take to bring inflation down to the Fed’s 2% goal.
Recession Forecast
The economic forecast prepared by the staff for the June meeting continued to assume that further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery.
“Given the continued strength in labor-market conditions and the resilience of consumer spending, however, the staff saw the possibility of the economy continuing to grow slowly and avoiding a downturn as almost as likely as the mild-recession baseline,” according to the minutes.
Officials will get two key economic reports before the July 25-26 FOMC meeting: the June employment report Friday and readings on consumer prices for the same month on July 12.
–With assistance from Jordan Yadoo.
(Updates with comment from analyst in third paragraph.)
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