Federal Reserve officials, in minutes from their May 2-3 meeting, pointed to significant uncertainty over the path forward for monetary policy. Central bank officials acknowledged the need to keep their options open as they debated whether to continue raising interest rates or hold them steady in the coming months.
Although officials were concerned about inflation, they increasingly felt that the impact of tight financial conditions and a slowdown in monetary policy action meant that their tightening campaign was almost over.
“Participants generally expressed uncertainty about how much more policy tightening would be appropriate,” the minutes said.
The new insight, released Wednesday afternoon, underscored just how seriously central bank officials were considering changing course and keeping interest rates steady when they met earlier this month. Although the minutes are released several weeks after each meeting, they are closely watched for clues about how central bankers are feeling and where monetary policy is headed.
The May minutes are particularly valuable as the path forward for monetary policy remains unclear. Fed officials continue to debate whether to raise interest rates or keep them steady when the next policy committee meets in mid-June.
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The latest release underscores the extent of the debate during the May meeting. Some officials felt that additional rate hikes might be warranted on the expected path for inflation, the minutes show. Many felt no further tightening was necessary, the minutes said. Officials generally agreed on the need to closely monitor incoming economic data ahead of the next policy meeting scheduled for June 13-14.
Some officials insisted during the May meeting that the change 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 — should not be interpreted as a signal from the Fed. The minutes showed it had ruled out further rate hikes this year, or it was leaning towards cutting rates. Fed officials have said for months that they don’t expect a cut in the federal-funds rate this year. Instead, they expect to keep the rate constant once a sufficiently constrained level is determined.
That view is at odds with the consensus forecast among investors, who continue to price in the significant possibility of at least a quarter-point rate cut by the end of the year.
After the minutes were released, traders put the probability of the Fed keeping rates the same at the June meeting at 72%, according to the CME FedWatch tool.
Minutes of the May meeting showed the central bank’s staff maintaining their view that a mild recession is likely later this year, citing the impact of an expected further tightening on bank lending conditions along with already tight financial conditions. Fed staff first released their recession forecast during a March meeting held in the immediate background of Silicon Valley Bank and Signature Bank.
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Failures. They see a slowdown followed by a “moderately brisk” recovery.
The staff forecast did not prevent officials from voting unanimously in favor of another quarter-point rate hike in May, bringing the federal-funds rate to a range of 5-5.25%. Central bank officials appeared to take a somewhat less optimistic view of the economic outlook, saying that while tightening credit conditions would weigh on economic activity, “the magnitude of these effects remained uncertain.”
Stocks were lower after the release, with the S&P 500 down 0.9% by 2:30 p.m. Eastern.
Write to Megan Cassella at [email protected]
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