Federal Reserve officials were concerned about the slow progress toward lower inflation and wary of the surprising staying power of the US economy at their June meeting — so much so that some even wanted to raise interest rates last month, rather than of holding them steady as the central bank eventually did, minutes of the meeting showed.
Fed officials decided to leave interest rates unchanged at their June 13-14 meeting to give themselves more time to see how the 10 consecutive hikes they previously made affected the economy. Higher interest rates slow down the economy by making it more expensive to borrow and spend money, but it takes months or even years for the effects to fully show.
At the same time, officials released economic forecasts suggesting they would increase two more quarter points this year. That forecast was meant to send a message: Fed policymakers simply slowed the pace of rate hikes by holding a meeting off. They did not stop their attack on rapid inflation.
The minutes of the meeting, released Wednesday, reinforced the message that further rate hikes were likely and offered more details about the June debate — underlining that Fed officials were divided on how the economy was developing and what to do about it.
All 11 Fed voting officials supported the June rate hike, but that unanimity hid tensions beneath the surface. Some central bank officials — 18 in all, including 7 not voting on policy this year — leaned toward a rate hike.
While “nearly all” Fed officials thought it was “appropriate or acceptable” to leave rates unchanged in June, “some” favored rate hikes or “could have supported such a proposal” given continued strength in the labor market, the continued momentum in the economy, and “few clear signs” of inflation getting back on track, the minutes showed.
And officials remained concerned that if they didn’t get inflation under control soon, there was a risk it could become such a normal part of everyday life that it would prove more difficult to stamp out.
“Almost all participants stated that, with inflation still well above the Committee’s long-term target and the labor market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation could cause inflation expectations to become unanchored were key factors these remain the policy outlook,” the minutes said.
The minutes underlined what a difficult time this is for the Fed. Inflation has fallen significantly overall, but that’s partly because food and fuel prices are cooling. An inflation measure that strips out those volatile categories – known as core inflation – makes much more inhibitory progress. That has caught the attention of the Fed, especially given signs that the broader economy is doing well.
“Core inflation has not slowed permanently since the beginning of the year,” Fed officials noted at the meeting, according to the minutes, noting “generally” that consumer spending was “higher than expected.” Officials reported hearing a flurry of reports from companies as some saw weaker economic conditions and others reported “greater than expected strength.”
The details of recent inflation data have also been troubling to some at the Fed. Officials noted that price increases for goods — physical purchases such as furniture or clothing — have been moderate, but slower than expected in recent months.
While rental inflation was expected to continue to cool and help lower headline inflation, “some” officials feared it would fall less decisively than hoped amid a low stock of homes for sale and a “less-than-expected delay” recently in rents for leases signed by new tenants. “Some” Fed officials noted that other service pricing “showed little sign of slowing down in recent months.”
Since the Fed meeting, officials have continued to indicate that further rate hikes are expected. Fed chairman Jerome H. Powell said during a speech last week in Madrid that he would expect rate hikes to continue at a slower pace – but he didn’t rule out that officials could return to back-to-back interest rate moves .
“We’ve had one meeting where we didn’t move, so that’s a moderation of pace in a sense,” he explained. “So I would expect something like this to continue, assuming the economy develops as expected.”
The question for investors is what would prompt the Fed to return to a more aggressive rate hike path — or, on the other hand, what would prompt officials to delay future interest rate moves.
Policymakers have made it clear that the course for rate hikes may change depending on what happens to the economy. If inflation shows signs of persistence, the labor market is unexpectedly strong and consumer spending continues to rise, that could indicate that even higher interest rates are needed to cool household and corporate spending to a point where companies are forced to to stop prices soaring.
Conversely, if inflation falls rapidly, the labor market cools and consumers pull back sharply, the Fed may feel more comfortable delaying future rate hikes.
For now, investors expect the Fed to raise rates at its July 25-26 meeting. And economists will keep a close eye on new labor market data released on Friday for the latest evidence of how the economy is evolving.