According to minutes released on Wednesday, almost all Federal Reserve officials at their June meeting expressed the likelihood of further tightening, but at a slower pace than the rapid rate increases seen since early 2022. The decision to hold off on a rate rise was made due to concerns over economic growth, despite the majority of members believing that more hikes are on the horizon. The officials felt that leaving the target range unchanged during this meeting would allow them more time to evaluate the economy’s progress towards the Committee’s goals of maximum employment and price stability.
Policymakers Consider Impact of Previous Rate Increases
Members of the Federal Open Market Committee voiced hesitance over a variety of factors. They believed that a brief pause in rate increases would provide the committee with an opportunity to assess the impacts of the previous hikes, which amounted to a total increase of 5 percentage points. These aggressive moves were the most significant since the early 1980s. The minutes noted that the economy was facing challenges from tighter credit conditions, including higher interest rates for households and businesses, which could potentially hinder economic activity, hiring, and inflation. However, the extent of these effects remained uncertain.
The unanimous decision to keep rates unchanged was made in consideration of the cumulative tightening in monetary policy and the time it takes for policy changes to affect economic activity and inflation. Despite this decision, financial markets showed little reaction to the release, with the Dow Jones Industrial Average down approximately 120 points near the end of trading, while Treasury yields experienced a sharp increase.
Differing Opinions on Future Rate Hikes
The minutes revealed some disagreement among the committee members. According to projection materials released after the June meeting, all but two of the 18 participants expected at least one rate hike to be appropriate in the current year, with 12 members anticipating two or more hikes. The minutes stated that those favoring a 25 basis point increase believed that the labor market remained tight, economic activity had exceeded earlier expectations, and there were few indications that inflation would return to the Committee’s 2 percent objective in the foreseeable future. However, even among those in favor of tightening, there was a general consensus that the pace of rate hikes would slow down. The Committee had already implemented four consecutive 0.75 percentage point increases at previous meetings and recognized the need for a further moderation in order to observe the effects of the cumulative tightening and assess their implications for future policy decisions.
Since the June meeting, policymakers have consistently emphasized their commitment to combating inflation. During a congressional hearing, Federal Reserve Chairman Jerome Powell stated that the central bank still has a long way to go to bring inflation back to its 2 percent goal. He also highlighted the unity among the 18 Federal Open Market Committee members, with all of them foreseeing rates remaining at their current levels until the end of the year, and all but two members expecting rates to rise. Despite some reservations, this sentiment has largely remained true. For instance, Atlanta Fed President Raphael Bostic expressed the belief that rates are sufficiently restrictive and that officials can now take a step back and observe the delayed impact of the 10 previous rate hikes on the economy.
Recent data has largely supported the Federal Reserve’s stance, despite inflation remaining above the target. The Fed’s preferred inflation gauge showed a modest increase of 0.3% in May, although it still reflected an annual rate of 4.6%. Additionally, while the labor market has shown some signs of loosening, there is still a significant disparity between job openings and available workers, with job openings outnumbering available workers by a ratio of nearly 2-to-1. Fed officials have emphasized the importance of reducing this disparity as they aim to curb the demand that has contributed to higher inflation.
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