During their June meeting, nearly all Federal Reserve officials indicated that there would likely be further policy tightening, albeit at a slower pace compared to the rapid rate increases seen since early 2022, as revealed in the recently released minutes.
Despite the expectation of future rate increases, policymakers decided against a rate hike in June due to concerns about economic growth. This decision came after ten consecutive rate increases and was influenced by factors such as the delayed impact of previous policy changes.
The officials believed that keeping the target range unchanged in June would provide them with more time to assess the progress of the economy towards achieving the Committee’s goals of maximum employment and price stability.
Members of the Federal Open Market Committee expressed hesitation due to various factors, including the potential effects of the 5 percentage points worth of rate hikes, which have been the most aggressive moves since the early 1980s. The minutes stated that tighter credit conditions resulting from higher interest rates could weigh on economic activity, hiring, and inflation, although the extent of these effects remained uncertain.
The unanimous decision to not hike rates was made in consideration of the significant cumulative tightening in monetary policy and the time it takes for policy changes to affect economic activity and inflation.
The minutes also revealed some disagreement among the committee members. According to the projection materials released after the June meeting, all but two of the 18 participants anticipated that at least one rate hike would be appropriate this year, with 12 expecting two or more hikes.
Those in favor of a 25 basis point increase noted the tight labor market, stronger-than-anticipated economic activity, and a lack of clear signs that inflation would return to the Committee’s 2 percent target.
Even among those favoring tightening, there was a general sentiment that the pace of rate hikes, which included four consecutive 0.75 percentage point increases at successive meetings, would slow down. They believed it was appropriate to moderate the pace to observe the effects of the cumulative tightening and assess its implications for policy.
Since the meeting, policymakers have mostly maintained the stance that they will not rush in the fight against inflation. Fed Chairman Jerome Powell, in his remarks to Congress, emphasized a united front among the 18 Federal Open Market Committee members, with all of them expecting rates to remain at least where they are by the end of the year, and most of them foreseeing rate increases.
Despite some reservations, this stance has largely held true. Atlanta Fed President Raphael Bostic, for instance, has expressed the view that rates are sufficiently restrictive and officials can now take a step back and observe the impact of the previous 10 rate hikes on the economy.
Data has also mostly supported the Fed’s position, although inflation remains above the target. The Fed’s preferred inflation gauge showed a modest 0.3% increase in May, reflecting an annual rate of 4.6%. The labor market has shown some signs of loosening, although job openings still outnumber available workers by a significant margin.
Fed officials have stressed the importance of reducing this disparity as they aim to curb the demand that has been driving inflation higher.
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