Fed minutes: A tale of two camps

The Federal Reserve minutes of the meeting held on May 2-3 were published yesterday, revealing a growing division among FOMC members on the forward path for monetary policy.

While the decision to increase the benchmark rate by a quarter percentage point to a range of 5.00 – 5.25% was unanimous, the meeting summary reflects that policymakers were divided over how much more policy tightening, if any, would be needed going forward. “Several participants” noted that, if the economy evolved along the lines of their current outlooks, then “further policy firming may not be necessary”, while others commented that additional policy firming at future meetings would be warranted based on their expectations that progress in bringing down inflation to 2 percent “could continue to be unacceptably slow”.

The release of the minutes follows recent comments from several Fed officials which have expressed a wide range of opinions, validating the differing views inside the central bank. Last week, Fed Chair Powell voiced openness to pausing at the June meeting, flagging in an interview that after a year of aggressive rate increases officials could afford to look at the incoming data and evolving outlook to make careful assessments. The comments were echoed by Atlanta Fed President Bostic who said he was still “inclined” to keep interest rates steady at the June meeting, while San Francisco Fed President Mary Daly also voiced for patience stating that according to her data, the credit tightening in the wake of recent bank failures may be equivalent to “a couple of rate hikes”.

However, multiple speeches this week by other central bank officials have clouded this picture. On Monday, St. Louis Fed President James Bullard, a long-time hawk, said he thinks the Committee will need to hike two more times this year to put enough downward pressure on inflation, adding that he advocates the moves happen “sooner rather than later”. His colleague, Minneapolis Fed President Neel Kashkari (a voter in 2023), admitted that “we may have to go north of 6%”, though he noted the decision on a June rate lift remains a close call, while Dallas Fed President Logan (also a voter this year) said the case for pausing rate increases in June isn’t clear just yet.

What most Fed officials seem to agree on however is the need to retain optionality. The Committee largely acknowledged the path ahead is “less certain” as a result of the recent turmoil in the banking sector as well as the lagged effects of cumulative tightening. On the economy, expectations remained that Real GDP would decelerate over the next two quarters and a mild recession would follow beginning in the fourth quarter, followed by a moderately paced recovery. While a substantial portion of the minutes were once again dedicated to monitoring the impact of tighter lending standards on economy activity, there seemed to be less concern of banking instability. The officials noted that actions taken by the Fed, in coordination with other government agencies, had served to calm conditions in that sector and pointed to a moderation in deposit outflows in the weeks following the initial outflows experienced by some regional and smaller banks in early March. Many participants also highlighted that it is essential the debt limit be raised in a timely manner to avoid severe adverse dislocations in the financial system and broader economy.    

Ultimately, we think for market participants looking for clarity on the future path of monetary policy, the minutes, in addition to the latest communication from policymakers, perhaps provides more questions than answers. The reality remains that uncertainty currently appears high among the Committee members and decisions on further lift offs will depend on the incoming economic data, particularly on the upcoming jobs report and inflation reading. With still a few weeks to go until the next FOMC meeting in June 13-14, our main takeaway from the latest report is the growing and clear split that looks to exist among Fed officials. That and the importance of keeping their options open so as to maintain flexibility when trying to carefully navigate the current economic landscape and eventually bring inflation down to the Fed’s longer-run 2 percent target. One thing is for sure though: the probability of a pause is higher with a split between doves and hawks as opposed to, what up until this point has been, a largely hawkish Committee.