© Reuters. FILE PHOTO: An eagle graces the facade of the US Federal Reserve Building in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo
Written by Howard Schneider
WASHINGTON (Reuters) – The U.S. Federal Reserve agreed to keep interest rates steady at its June meeting as a way to buy time and assess whether more rate hikes are needed, even as the vast majority predicted they would eventually need to tighten policy further. According to the meeting minutes released on Wednesday.
While “some participants” wanted to push through with a rate hike in June because progress in calming inflation has been slow, “nearly all participants saw it appropriate or acceptable to maintain” the federal funds rate at 5% to the current 5.25%, Minutes said.
“Most of these participants noted that leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress,” toward returning inflation to 2% from its current level by more than double that.
The minutes added detail to the statement of policy and economic outlook released after the June 13-14 session, when the Fed ended its 10-consecutive streak of rate hikes with a decision to hold the federal funds rate steady.
Markets didn’t change much after the minutes, as futures traders pegged to the Fed’s policy rate continued to price in a July rate hike and about a one in three chance of another increase before the end of the year.
While the Fed staff still see a “moderate recession” starting later this year, they now view avoiding deflation as a possibility just below the baseline. Meanwhile, policymakers grappled with data showing continued labor market tightness and modest improvements in inflation.
Officials also tried to reconcile key numbers showing continued economic strength with evidence of potential weakness — for domestic workers numbers that indicated a weaker job market than salary numbers indicated, or national income data that appeared weaker than more prominent GDP readings. .
The logic of waiting, whether it’s “skipping” one meeting or turning into a longer pause, reflects what officials said remains deep uncertainty about whether the Fed has actually raised rates enough to tame inflation — and just needs to wait it out. In order to achieve the effect of the tougher policy – or still need to rely on the economy more.
The minutes stated that “most of the participants noted that uncertainty about the future of the economy and inflation remain high and that additional information would be valuable to consider the appropriate stance of monetary policy.”
Projections released after the June meeting showed that 16 of 18 officials still expect the policy rate to need to increase at least another quarter of a percentage point by the end of the year.
In this context, Fed Chairman Jerome Powell said in a press conference after the June meeting that the decision represented a shift in strategy, with the central bank focusing more on the need for additional policy tightening and less on maintaining a steady pace of increases. .
“Stretching at a more moderate pace is appropriate to allow you to make that judgment” over time, Powell said.
Investors in contracts linked to the overnight federal funds rate feel that the Fed is likely to raise the benchmark rate by a quarter point, to a range between 5.25% and 5.5%, at its July 25-26 meeting.