December 11, 2023

Minutes show Fed sees more rate hikes ahead, but at a slower pace

Nearly all Fed officials said at their June meeting that further tightening of monetary policy was likely, but at a slower pace than the rapid pace of monetary policy hikes since early 2022, according to meeting minutes released on Wednesday.

Policymakers decided not to raise rates amid concerns about economic growth, although most members believed further hikes were on the way. Given the lagged impact of policy and other concerns, they see room to skip the June meeting after 10 consecutive rate hikes.

Officials argued that “keeping the target range unchanged at this meeting would allow them more time to assess the economy’s progress toward the Committee’s maximum employment and price stability goals.”

FOMC members expressed hesitation on a combination of factors.

They said the short pause would give the committee time to assess the impact of the rate hikes, which totaled 5 percentage points, the most aggressive move since the early 1980s.

“The economy is facing headwinds from tighter credit conditions, including higher household and business interest rates, which could affect economic activity, employment, and inflation, although the magnitude of these effects remains uncertain,” the minutes said.

The unanimous decision not to raise rates was “given the significant cumulative tightening of the stance of monetary policy and the lag with which policy affects economic activity and inflation”.

The market reacted little to the announcement. Towards the final hour of trading, the Dow Jones Industrial Average fell about 120 points, while U.S. Treasury yields were sharply higher.

Disagreement within the Fed

The document reflects some disagreement among members. All but two of 18 participants expect at least one rate hike this year, and 12 expect two or more hikes, according to forecast materials released after the June 13-14 meeting.

“Participants in favor of a 25-basis-point hike noted that the labor market remained very tight, economic activity was stronger than previously expected, and there were few clear signs that inflation was returning to the Committee’s 2 percent objective at any time,” the minutes said. Said.

Even among those who favor tightening, there is general consensus that the pace of rate hikes, which included four consecutive 0.75 percentage-point hikes in consecutive meetings, will slow.

“Many (officials) also noted that a further slowdown in the pace of policy tightening was appropriate as the Committee slowed the pace of tightening following a rapid tightening of its monetary policy stance last year to provide more time to observe the impact of cumulative tightening and assess Its implications for policy,” the minutes said.

Since the meeting, policymakers have mostly stuck to the narrative that they don’t want to back down too quickly in the fight against inflation.

Speaking to Congress a week after the June 13-14 meeting, Fed Chairman Jerome Powell said the central bank had “a long way to go” to get inflation back to the Fed’s 2 percent target.

He also highlighted the united front among the 18 members of the Federal Open Market Committee, noting that they all expect rates to remain where they are at least through the end of the year, and all but two see them rising.

Despite some misgivings, this is largely true. For example, Atlanta Fed President Raphael Bostic said he thinks rates are restrictive enough that officials can now let their guard down and wait for the lagged impact of 10 rate hikes on the economy.

The data also largely sided with the Fed, even though inflation remained well above target.

More recently, the Fed’s preferred measure of inflation rose just 0.3% in May, still reflecting a 4.6% annual rate.

The labor market is also showing some signs of easing, although job vacancies still outnumber available workers by nearly two to one. Fed officials have stressed the importance of closing that gap as they look to curb the demand that drives up inflation.