Interest rate divergence in Fed minutes

The Fed minutes highlighted the division among officials on further rate hikes. The minutes indicated that the extent of possible rate hikes had become less certain and that officials continued to expect a moderate recession this year. The Fed released the minutes of the May 2-3 Federal Open Market Committee (FOMC) meeting. The minutes of the last meeting, in which the policy rate was raised by 25 basis points to a 16-year high of 5% to 5.25%, showed that Fed officials were divided on whether further rate hikes were necessary. The minutes indicated that officials were generally uncertain about how much further policy tightening would be appropriate. “Some officials commented that additional policy tightening would likely be necessary at future meetings based on expectations that progress in reducing inflation to 2% could continue to be unacceptably slow,” the Fed minutes read. The minutes noted that several officials said further policy tightening might not be necessary after the May meeting if the economy continues on current outlooks. Inflation emphasis The Fed minutes said officials generally agreed that it had become “less certain” after that meeting the extent to which further rate hikes would be appropriate, given the lagged effects of the cumulative tightening of monetary policy and the potential impact on the economy of the tightening in credit conditions. The officials agreed that inflation was unacceptably high, the minutes said, and that data through March showed that declines in inflation had been slower than expected, particularly in measures of core inflation. ‘More-than-expected tightening likely leads to moderate recession’ forecast The minutes said that Fed staff continued to predict that the effects of more-than-expected tightening in bank credit conditions, at a time when financial conditions were already tight, would lead to a “moderate recession” later this year. In light of the significant risks to the maximum employment and price stability targets, the minutes indicated that officials generally emphasized the importance of closely monitoring incoming information and its impact on the economic outlook, and noted that risks to the economic outlook were predominantly downward. Concerns about the debt limit were noted The minutes also indicated that some officials drew attention to concerns that the debt limit could not be increased in time, which could pose a threat of significant disruptions in the financial system and tighter financial conditions that would weaken the economy. The Fed minutes indicated that many officials discussed the importance of increasing the debt limit in a timely manner to avoid the risk of serious disruptions in the financial system and the economy in general. The minutes also stated that there was agreement that banking sector stress would put more pressure on economic activity, but noted that the extent of this remained unclear.