Federal Reserve officials worried about sluggish progress toward lower inflation and cautiously watched 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 like the central bank. finally 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. At the same time, they released economic forecasts that suggested they would raise rates two more times this year.
The meeting minutes, released Wednesday, offered more details about the debate that went into that decision — and underscored that Fed officials were divided about how the economy is shaping up and what to do about it.
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” because of continued strength in the labor market, sustained momentum. in the economy, and “few clear signs” that inflation is back on track, the minutes showed.
“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.”
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.”
Fed staff, the economists and analysts who inform Fed officials who set policy, continued to expect a mild recession starting in late 2023 and extending into early next year, the Fed minutes showed. But they saw “the possibility that the economy continues to grow slowly and avoid a downturn as almost as likely as the baseline of a mild recession.”
Since the Fed meeting, officials have maintained a watchful attitude. 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.