Fed Uncertain About More Rate Hikes, Minutes Show

Article originally posted on HERE on May 24, 2023

Federal Reserve officials indicated significant uncertainty over the path forward for monetary policy, minutes from their May 2-3 meeting show. Central bank officials acknowledged a need to keep their options open as they debated whether to keep raising interest rates or hold them steady in coming months.

While officials remained concerned about inflation, they increasingly felt that the impact of stricter financial conditions and the lag with which monetary policy operates could mean their tightening campaign was nearly done.

“Participants generally expressed uncertainty about how much more policy tightening may be appropriate,” the minutes say.

The fresh insight, released Wednesday afternoon, underscores how seriously Fed officials considered changing course and holding interest rates steady when they met earlier this month. Though the minutes are released several weeks after each meeting, they’re closely watched for clues as to how central bank officials are feeling and where monetary policy is headed.

The May minutes are particularly valuable given that the path forward for monetary policy remains unclear. Fed officials continue to debate whether to raise interest rates or hold them steady when the policy committee next meets in mid-June.

The latest release underscores the extent that discussion took place during the May meeting. Some officials felt that additional rate hikes would likely be warranted given the expected path forward for inflation, the minutes show. Several others felt that further tightening wouldn’t be necessary, the minutes say. Officials agreed in general on the need to keep a close eye on incoming economic data and to keep their options open ahead of the next policy meeting, scheduled for June 13-14.

Some officials emphasized during the May meeting that the shift in the Fed’s policy outlook—including the decision to remove language from the statement that “ongoing increases” in the policy rate would be appropriate—shouldn’t be interpreted as a signal that the central bank had ruled out further rate hikes this year, or that it was leaning cutting rates, the minutes show. Central bank officials have said for months that they don’t anticipate a cut in the federal-funds rate this year. Instead, they expect to hold the rate steady once a sufficiently restrictive level has been determined.

That view stands at odds with the consensus forecast among investors, who continue to price in a significant likelihood of at least one quarter-point rate cut by the end of this year.

After the minutes were released, traders put the probability that the Fed keeps rates the same at June’s meeting at 72%, according to CME FedWatch Tool.