Almost all Federal Reserve officials at the Federal Open Market Committee's May 2-3 meeting said downside risks to growth and upside risks to unemployment had increased due to banking stresses, according to the FOMC minutes released Wednesday.
The meeting notes also showed that FOMC members were split on the need for further rate increases. With the increased risks, participants "generally expressed uncertainty about how much more policy tightening may be appropriate." Some, though, said additional "policy firming would likely be warranted at future meetings," if progress in bringing down inflation to the Fed's 2% target remained "unacceptably slow."
The Fed staff's economic forecast expects further tightening in bank credit conditions, along with the already tight financial conditions to lead to a mild recession starting later this year. Real GDP was expected to decelerate over the next two quarters, then decline modestly in both Q4 2023 and Q1 2024, according to the minutes.
The FOMC members, though, who didn't issue economic projections at the May meeting, generally expect real GDP to increase at a pace below its longer-run trend rate in 2023, reflecting the effects of restrictive financial conditions.
"Participants assessed that the cumulative tightening of monetary policy over the past year had contributed significantly to more restrictive financial conditions," the minutes said. "They also judged that banking-sector stress would likely weigh further on economic activity, but the extent to which that would be the case remained highly uncertain."
The officials also discussed the debt limit situation: "Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy."
The policymaking committee increased its key rate by 25 basis points in May, representing its 10th straight rate hike, to 5.00%-5.25%. Within the past 15 months, the central bank ratcheted up the federal funds rate target range from near 0% in an effort to push inflation down.
The FOMC's statement had removed the language signaling further rate hikes, leading many Fed watchers to believe the central bank was ready to pause its rate-hiking path. Traders assign a 65.8% probability that the policy rate will stay at 5.00%-5.25% at the Fed's June 13-14 meeting, according to the CME FedWatch tool. But the 34.2% probability of a 25-bp increase isn't insignificant.