US Fed officials split on support for more rate hikes, minutes show

NEW YORK – US Federal Reserve officials at their May meeting were divided over whether further interest rate increases would be necessary to lower inflation amid high uncertainty about the impact of banking-sector stresses on the economy.

“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” minutes from the May 2 to 3 meeting, published on Wednesday, showed.

“Some participants commented that, based on their expectations that progress in returning inflation to 2 per cent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.”

Equities held on to earlier increases, while the yield on US Treasuries remained elevated. The dollar maintained gains against a basket of currencies.

The May gathering was a decisive juncture for the Federal Open Market Committee (FOMC). Policymakers raised their benchmark federal funds rate to a range of 5 per cent to 5.25 per cent – a level that most officials in March estimated would be sufficiently restrictive to bring inflation lower in 2024.

But the economy, labour market and price pressures have all proved more resilient than expected, though banking strains following the collapse of four regional US lenders are potential headwinds for growth.

Amid conflicting forces, the FOMC’s June meeting is shaping up to be a decision over a temporary pause or another rate increase, fraying the strong consensus among the central bank’s 18 officials.

Retain optionality

“Many participants focused on the need to retain optionality,” the minutes said.

Hanging over the economic outlook is the threat of a possible US debt default if Congress does not raise the debt ceiling in the coming days. Treasury Secretary Janet Yellen says the money could run out as soon as June 1.

Some Fed officials at the meeting “noted concerns that the statutory limit on federal debt might not be raised in a timely manner, threatening significant disruptions to the financial system and tighter financial conditions that weaken the economy”.

Investors have raised bets on a rate increase by the July meeting to more than 50 per cent, according to pricing in futures contracts.

Fed chairman Jerome Powell last week cited the lagged effects of the central bank’s 5 percentage points of tightening over the past 14 months and worries about financial stability as reasons that officials can pull into a rest stop and give their policies time to work.

“We’ve come a long way in policy tightening, and the stance of policy is restrictive, and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” Mr Powell said last Friday in Washington.

Evolving outlook

“Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments,” he said.

Yet, several of his colleagues have pushed back, arguing that rates need to keep heading higher amid a still-strong job market and persistent price pressures.

Inflation, minus food and energy, remained stubbornly high at 4.6 per cent in March, which is more than double the Fed’s 2 per cent target.

Policy hawks worry that it is not falling fast enough, and will not fall unless they stamp harder on the brakes.

“Almost all participants stated that, with inflation still well above the committee’s longer-run goal and the labour market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook,” the minutes said. “A few participants noted that they also saw some downside risks to inflation.”

Doves say the full impact of their actions so far have not yet been felt, while the effect of tighter credit conditions is equivalent to at least one or two rate increases, if not more. BLOOMBERG