Fed Minutes July 2023:

Almost all Federal Reserve officials at their June meeting indicated that further tightening was likely, albeit at a slower pace than the rapid rate hikes that have dominated monetary policy since early 2022, minutes released on Wednesday said.

Policymakers decided against raising interest rates over concerns about economic growth, although most members believe more rate hikes are imminent. Citing the delayed impact of the policy and other concerns, they saw scope to skip the June meeting after ten straight rate hikes were decided.

Officials felt that “keeping the target range at this meeting would give them more time to assess the economy’s progress towards the committee’s goals of maximum employment and price stability.”

Federal Open Market Committee members raised concerns about a variety of factors.

They said a brief pause would give the committee time to assess the impact of the increases, which totaled 5 percentage points, the most aggressive moves since the early 1980s.

“The economy faced headwinds from tighter credit conditions, including higher interest rates, for households and businesses that were likely to weigh on economic activity, hiring and inflation, although the extent of that impact remained uncertain,” the minutes said.

The unanimous decision not to raise interest rates came “in light of the significant cumulative tightening of monetary policy and the lags with which policies are affecting economic activity and inflation”.

Markets barely reacted to the release. The Dow Jones Industrial Average lost about 120 points late in the last hour of trading, while government bond yields rose sharply.

Fed disagreement

The document reflected some disagreements among members. According to forecasting materials released after the June 13-14 meeting, all but two of the 18 participants believed at least one increase would be appropriate this year, and 12 expected two or more.

“Participants, who supported a 25 basis point hike, noted that the labor market remained very tight, the momentum of economic activity had been stronger than previously expected and there were few clear signs that inflation was on the way to Time to return beyond the committee’s 2 percent target,” the minutes said.

Even among those in favor of tightening, there was a general feeling that the pace of rate hikes, which included four consecutive hikes of 0.75 percentage points in consecutive sessions, was slowing.

“Many [officials] also noted that following the rapid tightening of monetary policy over the past year, the Committee had slowed the pace of tightening and that further moderation of the pace of monetary tightening was appropriate to gain additional time to monitor the impact of the cumulative tightening and its implications evaluate for politics,” it said in the minutes.

Since the meeting, policymakers have largely stuck to the narrative that they do not want to back down too quickly in the fight against inflation.

Speaking to Congress a week after the June 13-14 meeting, Fed Chair Jerome Powell said the central bank has “a long way to go” to bring inflation back to the Fed’s 2 percent target bring to.

He also stressed the unity of the 18 members of the Federal Open Market Committee, noting that all expect rates to stay at least where they are through year-end and all but two expect rates to rise.

Despite some misgivings, this has largely turned out to be true. Atlanta Fed President Raphael Bostic, for example, has said he believes interest rates are sufficiently restrictive that officials can now cringe while awaiting the delayed effects of the ten rate hikes that are taking hold in the economy.

The data has also been largely pro-Fed, although inflation remains well above target.

Most recently, the Fed’s preferred indicator of inflation rose just 0.3% in May, although it was still at an annualized rate of 4.6%.

The labor market is also beginning to show signs of easing, although the number of vacancies is still almost 2:1 larger than the number of workers available. Fed officials have stressed the importance of reducing this inequality as they seek to rein in the demand that has been driving inflation.

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