Federal Reserve officials were concerned about sluggish progress toward lower inflation and wary of the surprising staying power of the U.S. economy at their June meeting — so much so that some even wanted to raise rates last month, rather than hold them steady as the central bank ultimately did. did minutes from the meeting showed.
Fed officials decided to leave interest rates unchanged at their June 13-14 meeting to give themselves more time to see how the 10 straight hikes they previously made affect the economy. Higher interest rates slow the economy by making it more expensive to borrow and spend money, but it takes months or even years for their full effects to emerge.
At the same time, officials released economic forecasts that suggested they would make two more quarter-point rate hikes this year. That forecast was meant to send a message: Fed policymakers simply slowed the pace of rate hikes by adjourning a meeting. They have not stopped their attack on rapid inflation.
The meeting minutes, released Wednesday, both reinforced the message that further interest rate hikes are likely and offered more details about the June debate — underscoring that Fed officials were divided on how the economy is shaping up and what to do about it.
All 11 of the Fed’s voting officials supported the June rate cut, but that unanimity hid tensions beneath the surface. Some of the central bank’s officials — 18 in all, including 7 who don’t vote on policy this year — leaned toward a rate hike.
While “almost all” Fed officials thought it was “appropriate or acceptable” to leave rates unchanged in June, “some” either favored raising interest rates or “could support such a proposal” given continued strength in the labor market, steady momentum in the economy , and “few clear signs” that inflation is back on track, the minutes showed.
And officials remained concerned that if they failed to quickly wrestle inflation under control, there was a risk that it could become such a normal part of everyday life that it would prove harder to push out of the way.
“Almost all participants stated that, with inflation still well above the Committee’s long-term objective and the labor market remaining tight, further risks to the inflation outlook or the possibility that persistently high inflation could cause inflation expectations to weaken remained key factors shaping the inflation. political perspective,” the minutes said.
The minutes underscored what a difficult moment this is for the Fed. Inflation has declined especially on an overall basis, but that’s partly because food and fuel prices are cooling. An inflation measure that strips out those volatile categories—known as core inflation—is much more likely to halt progress. That caught the Fed’s attention, especially given signs that the broader economy was holding up.
“Core inflation has not shown a sustained easing since the beginning of the year,” Fed officials noted in the meeting, according to the minutes, and they “generally” noted that consumer spending was “stronger than expected.” Officials reported that they heard a range of reports from businesses, as some saw weaker economic conditions and others reported “greater than expected strength.”
The details of recent inflation data were also worrying for some at the Fed. Officials noted that prices for goods – physical purchases such as furniture or clothing – have moderated, but less quickly than expected in recent months.
While rental inflation was expected to continue to cool and help lower headline inflation, “some” officials worried it would decline less decisively than hoped amid low for-sale housing inventory and a “less-than-expected slowdown” recently. in leases for leases signed by new tenants. “Some” Fed officials noted that other service prices “have shown few signs of slowing in recent months.”
Since the Fed meeting, officials have continued to signal that further rate hikes are expected. Jerome H. Powell, the Fed chair, said during an appearance last week in Madrid that he would expect to continue with a slower pace of interest rate hikes – but he did not rule out that officials could return to back-to-back rates. .
“We did take one meeting where we didn’t move, so that’s kind of a moderation of the pace,” he explained. “So I would expect something like this to continue, assuming the economy develops as expected.”
The question for investors is what would prompt the Fed to return to a more aggressive path for rate hikes — or, on the other hand, what would cause officials to hold off on future rate hikes.
Policymakers have made it clear that the path forward for interest rate hikes could change depending on what happens with the economy. If inflation shows signs of holding back, the labor market is unexpectedly strong and consumer spending continues to soar, that could suggest even higher interest rates will be needed to cool household and business spending to a point where companies are forced to shut down. raising prices so much.
If, on the other hand, inflation comes down quickly, the labor market cools and consumers pull back sharply, the Fed could feel more comfortable holding off on future rate hikes.
Currently, investors are waiting the Fed to raise interest rates at its meeting of July 25-26. And economists will be closely watching fresh labor market data due for release on Friday for the latest evidence of how the economy is faring.