The minutes of the May US Federal Reserve meeting acknowledged that the certainty regarding the need for further monetary policy tightening had diminished. While some participants believed that additional tightening would be necessary due to the slow progress in achieving the Fed’s inflation target, several others suggested that if the economy followed their current outlook, further policy firming might not be required after the meeting.
The Federal Reserve staff maintained their expectation of a mild recession later in the year, while FOMC participants anticipated below-trend growth in 2023. Inflation was once again described as unacceptably high and participants expressed their surprise at the slower-than-expected decline in measures of core inflation.
Since the May meeting, the Fed leadership, including Chair Powell, has stressed that monetary policy is restrictive and that risks to policy have become more balanced, aligning with my anticipation of a pause at the June FOMC meeting. However, reflecting the divisions mentioned in the minutes, Fed officials have expressed a range of perspectives on the near-term policy outlook.
The minutes of the May FOMC meeting highlighted that participants generally agreed that the appropriateness of further monetary policy tightening had become less certain. Many participants expressed the view that the Committee should maintain flexibility in its policy decisions beyond May.
While some participants believed that additional tightening would likely be necessary due to the slow progress in achieving the FOMC’s inflation target, several others noted that if the economy followed their current outlooks, further policy firming might not be required after this meeting.
The Federal Reserve staff maintained their expectation that the economy would experience a mild recession later this year, primarily due to the anticipated tightening in bank credit conditions amidst an already tight financial environment.
According to their projections, real GDP growth is expected to decelerate in the second and third quarters, followed by a modest decline in the fourth quarter of 2023 and the first quarter of 2024. They anticipated positive but below-potential growth in 2024 and 2025.
FOMC participants noted that economic activity expanded at a modest pace in the first quarter, and they generally expected below-trend growth in 2023, reflecting the impact of restrictive financial conditions. They believed that bank stress would likely further weigh on economic activity, although the extent of this impact remained highly uncertain. Participants continued to anticipate that a period of below-trend growth and some softening in labour market conditions would be necessary to alleviate inflationary pressures.
Participants reiterated their characterization of inflation as “unacceptably high,” and they expressed their observation that the declines in measures of core inflation had been slower than anticipated.
They specifically highlighted the persistent strength in core non-housing services inflation, noting that there were few signs of it slowing down compared to the previous assessment of little evidence in the April minutes.
The Fed’s leadership, including Chair Powell, has consistently emphasized the restrictive nature of monetary policy and the increased two-sided risks to monetary policy. These statements align with my anticipation of a pause at the June FOMC meeting.
However, other Fed officials have expressed a wide range of views regarding the near-term policy outlook. In a recent speech, Governor Waller highlighted that the decision in June would depend on the incoming data over the next three weeks. He also stressed that he does not support halting rate hikes unless there is clear evidence of inflation moving down toward the 2 percent objective.
Furthermore, he stated that he does not expect the upcoming data in the following months to conclusively indicate that the terminal rate has been reached. Nevertheless, Governor Waller acknowledged that if there were significant concerns regarding downside risks, prudent risk management would suggest skipping a hike in June but leaning towards hiking in July based on incoming inflation data.
Market commentary and analysis from Luca Santos, currency analyst at ACY Securities