‘Several’ Fed officials said more rate hikes may not be needed and other key takeaways from May minutes

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Minutes of the Federal Reserve’s May policy meeting show that officials were divided over the path forward.

At their meeting, the Fed hiked its benchmark interest rate by a quarter of one percentage point to a range of 5%-5.25%. The central bank also altered its forward guidance to indicate it could pause at their next meeting.

Here are some key takeaways from the minutes.

Several Fed officials said further rate hikes may not be needed

In their discussion of the outlook for policy, “several” officials said that if the economy evolved as they expected “then further policy firming after this meeting may not be needed.”

Only “some” officials said that they thought additional policy firming was “likely.”

Some Fed officials stressed that Fed should communicate that cuts in interest rates were not likely this year and that further rate hikes had not been ruled out.

Fed staff sharpens recession call, saying it will start in fourth quarter

The Fed staff said that a pull back in bank lending, amid already tight financial conditions, would lead to a mild recession starting in the fourth quarter. The recession would be followed by a moderately paced recovery.

Stress in the banking system after the failure of several regional U.S. banks in recent months was central to their forecast. If the stress was not as bad as feared, the risks would be tilted toward the upside for the economy, the staff said.

So far, credit quality remains solid for most businesses and households

The Fed staff reported that the survey of bankers showed that credit quality of most businesses and households remained solid, with some deterioration on the margins. Banks said they were concerned about future deterioration of the quality of their loan portfolios.

Fed officials see downside risks to growth and upside risks to inflation

The minutes paint a gloomy picture of the outlook though. “Almost all” Fed officials said that downside risks to economic growth had increased along with higher upside risks for inflation.

Officials said that progress on core inflation had been slower than they had expected.

Since the early May meeting…

Since the Fed’s May meeting, officials have clustered into three camps: hiking rates again in June, “skipping” a meeting before raising rates again, or holding steady. Several officials have declined to give a forecast in recent weeks. All officials said they wanted to see all the economic data due before the June meeting, so the uncertainty may last until the Fed actually meets again on June 13-14. One big reason for this is that the government will release the May consumer price data on the morning of the first day of the Fed meeting.

Ian Shepherdson, chief economist at Pantheon Macro, said that the Fed is “on course for a June pause, but that it will be a narrow decision.

Paul Ashworth, chief North America economist at Capital Economics, said a July rate hike is a possibility.

Financial markets see about more than a 60% chance that the Fed holds steady in June. The market continues to price in rate cuts by the end of the year. Ashworth said the prospect for cuts “is fading.”

U.S. stocks
DJIA,
-0.31%

SPX,
+0.15%

remained lower Wednesday afternoon and the yield on the 10-year Treasury note
TMUBMUSD10Y,
3.724%

was higher after the minutes were released.

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