FOMC minutes: Fed members split on support for more interest rate hikes

The Federal Open Market Committee (FOMC) released the minutes of the May 2-3 meeting, triggering a limited reaction across financial markets. According to the document, officials were split on support for more interest rate hikes. They agreed that inflation was still “unacceptably high,” and they continue to see a “mild recession” later this year.

In May, the Federal Reserve (Fed) raised the key interest rates by 25 basis points to 5.00% - 5.25%, as expected. The central bank hinted at a potential pause at the June 13-14 meeting. Since the May meeting, economic data from the US has been mixed, but far from indicating a recession. The Consumer Price Index (CPI) slowed to 4.9% in April; however, the Core CPI rose to 5.5% from a year earlier. On Friday, the US will release April's Core Personal Consumption Expenditure Price Index, the Fed's preferred inflation gauge.

Key takeaways from the minutes:

“The economic forecast prepared by the staff for the May FOMC meeting continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery.”

“Participants agreed that the U.S. banking system was sound and resilient. They commented that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation. However, participants agreed that the extent of these effects remained uncertain.”

“Participants generally anticipated that under appropriate monetary policy, imbalances in the labor market would gradually diminish, easing pressures on wages and prices.”

“Participants agreed that inflation was unacceptably high.”

“Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy.”

“Participants generally agreed that in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain.”

“Participants generally expressed uncertainty about how much more policy tightening may be appropriate. Many participants focused on the need to retain optionality after this meeting.”

“Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.”

“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”

“Almost all participants stated that, with inflation still well above the Committee's longer-run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook. A few participants noted that they also saw some downside risks to inflation.”

Market reaction: 

The US Dollar Index held at two-month highs, slightly below 104.00 after the minutes. The reaction across financial markets was limited. EUR/USD remained near monthly lows under 1.0770.