May’s FOMC Minutes recap: Fed signals uncertainty

Divided views emerged on future rate hikes, upside risks to inflation remain

By Nadia Elbilassy | @Nadia Elbilassy | 25 May 2023

FOMC minutes recap
  • Divided views on future hikes, inflation risks remain

  • Minutes from the May meeting reveal officials' consensus on the reduced need for further interest rate increases

More flexibility for the next quarter

According to the recently released minutes of the May 2-3 Federal Reserve meeting, officials "generally agreed" that the need for further interest rate increases had become less certain. Several policymakers even suggested that the approved quarter-percentage-point increase might be the last. However, some emphasized the importance of keeping options open due to the risks of persistent inflation.

The minutes revealed that if the economy unfolded as anticipated, further policy firming might not be necessary, indicating a potential pause in the Fed's aggressive rate-hike campaign at the upcoming June 13-14 meeting. However, there was a division of opinions on the path ahead.

While some policymakers saw signs that previous tightening measures were having the intended impact, almost all participants recognized risks to growth resulting from a tightening of bank credit. At the same time, "almost all" acknowledged the presence of upside risks to inflation, leading many to emphasize the need for flexibility in either maintaining or increasing interest rates. There were differing views on the likelihood of further rate hikes.

It was stressed that conveying the possibility of rate cuts or ruling out rate increases entirely would be crucial to avoid sending misleading signals. The previous quarter-point rate increase had strong support across the board but was accompanied by language in the policy statement that indicated a potential pause in rate hikes.

The current policy rate of 5.00%-5.25% aligns with the peak median rate anticipated by policymakers in previous economic projections. Following the May rate increase, the Fed shifted to a meeting-by-meeting approach, potentially pausing rate hikes to allow the economy and financial system to adjust to the recent rapid increases in borrowing costs.

The minutes highlighted the importance of communicating the Fed's data-dependent approach to the public, reflecting the central bank's decision to revise its policy guidance and leave room for a potential rate hike pause while remaining open to future increases.