Federal Reserve officials are split on the path forward for interest rates, with a tilt toward less aggressive monetary policy in June. The minutes from the Federal Reserve’s May meeting shows that ‘some’ members believe there is more work to do to rein in inflation, while ‘several’ think their work is done.
“Participants generally expressed uncertainty about how much more policy tightening may be appropriate,” the minutes say. The Federal Open Market Committee, who makes the rate decisions, also voted to remove a key phrase from its post-meeting statement that had indicated ‘additional policy firming may be appropriate.’
According to the CME FedWatch tool, there is a 72% chance that the Fed holds rates steady at the June meeting.
Full Video Transcript Below:
J.D. DURKIN: All right. So let's talk about these recent Fed minutes. You and I have talked on and off for quite some time about how you can oftentimes learn quite a bit more from the minutes themselves, as opposed to just the announcement we get several weeks prior. Any big conclusions on your end from what we learned this week?
MARTIN BACCARDAX: I really thought the minutes were mixed this time, J.D., and to that degree I think the market is sort of like trying to parse out exactly what signal needs to be emanated from them. I was struck by the fact that some of the language indicated a larger number of participants that were happy to talk about a pause or even indicate that they would like to pause rate hikes into the summer months whilst they look at the data, whilst they understand the direction of inflation. And that description of several members, as opposed to a few members I thought was arresting and has been picked up by other analysts. And I think indeed as part of the broader market conversation. So in other words, it seems that the Doves are starting to resume control amongst the discussions of Fed members, but they aren't completely, they haven't completely taken the wheel just yet because the Hawks have pushed back, essentially saying that they're not satisfied with the rate of decline in inflation. They're worried about its persistency and the stickiness of some consumer price pressures, particularly in around that core services sector that they like to focus on. So as a result, J.D., what we are seeing is kind of a mixed interpretation of the numbers and indeed a mixed assumption of what they're going to mean for near-term rate hikes.
J.D. DURKIN: And of course, Fed officials stressing as they are fond of doing, that they are data dependent. You could have an entire game just with the frequency of using that phrase. Did we learn anything about the likelihood or possibility of a recession this year, I wonder, Martin.
MARTIN BACCARDAX: Well, that was part of the Fed forecasting. Actually, what we're going to get in the June meeting will be fresh official dot plot projections about where Fed officials see policy rates, where they see inflation and where they see growth. But the forecasts that they were working off in the May meeting do anticipate a mild second half recession. Essentially what they're saying is that as a result of a pullback in a whole host of metrics, business, capital spending being one of them, tighter credit conditions as a result of the bank failures that we saw in the early spring. And this persistent level of inflation, alongside the impact of the rate hikes that have already put in place, it's very likely that the economy will slow to a degree that will probably get those two consecutive quarters of negative GDP, which typically defined recession. Now, you're not seeing that evident in the data that we're watching right now. And market participants are split as to whether or not that's actually going to be the reality. But it's certainly the base at which the Fed is working from. And that's always important in terms of understanding their principles and where they think rates might be headed.
