Fed Says Need For Rate Hikes 'Less Certain' After May Meeting

Federal Reserve officials had a consensus last month that the need for further hikes in interest rates “had become less certain,” with several stating that the quarter-percentage-point hike that was approved last month being the last, based on the minutes of the meeting from 2-3 May, released on Wednesday. 

Others thought that the US Fed should keep its options open, given the risks of constant inflation, which is still going at more than the Fed’s two per cent target.  

"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," the minutes stated, further backing up expectations that the Fed is likely to pause its aggressive rate-hike campaign at its 13-14 June meeting. 

However, there was also disagreement. While Fed staff continued to forecast a mild recession late in the year, some policymakers “saw evidence that the past year’s tightening was beginning to have it intended impact,” with “almost all participants” seeing risks to economic growth as bank credit was tightened following multiple bank failures.  

Many also saw upside risks to inflation and “many participants focused on the need to further retain optionality” to either keep rates stable or increase them. Some considered more hikes in rate as “likely.”  

Furthermore, “some participants stressed that it was crucial” to not convey that rate cuts are likely or that more increases in borrowing costs “had been ruled out.”  

Speaking at event in California on Wednesday, Fed Governor Christopher Waller said, “Whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks.”  

“Between now and then, we need to maintain flexibility on the best decision to take in June,” Waller further added, indicating openness for a pause after months of rate increases where Waller was a prominent voice in favour of it. 

The May meeting took place in the midst of a political of a political standoff between the Biden administration and the Republicans in Congress on the topic of raising the US debt limit, a step which could lead to the country defaulting on payments to bondholders, if not taken. 

Fed officials noted the risks.