Federal Reserve Expects More Rate Hikes Ahead Amid ‘Upside Risks’ to Inflation: FOMC Minutes

Federal Reserve Board Chairman Jerome Powell speaks during an interview by David Rubenstein, chairman of the Economic Club of Washington, at the Renaissance Hotel in Washington on Feb. 7, 2023. Julia Nikhinson/Getty Images

Federal Reserve officials expect more rate hikes ahead, while some had advocated for a quarter-point increase at the June Federal Open Market Committee (FOMC) policy meeting, according to new minutes from the meeting.

Rate-setting Committee members agreed that more rate increases are ahead but at a slower pace. They also found it acceptable or appropriate to leave the target rate unchanged at 5 to 5.25 percent, noting that maintaining a restrictive stance would be ideal.

“In discussing the policy outlook, all participants continued to anticipate that, with inflation still well above the Committee’s 2 percent goal and the labor market remaining very tight, maintaining a restrictive stance for monetary policy would be appropriate to achieve the Committee’s objectives,” the FOMC minutes read. “Almost all participants noted that in their economic projections that they judged that additional increases in the target federal funds rate during 2023 would be appropriate.”

But some participants could have supported a 25-basis-point rate boost.

“Some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or they could have supported such a proposal,” the minutes of the June 13–14 meeting read.

Meeting participants noted that economic and inflation outlook uncertainty was “elevated” and that more information would be necessary to decide an appropriate monetary policy stance. But there are still upside risks to inflation, according to the minutes.

“Almost all participants stated that, with inflation still well above the Committee’s longer-run goal and the labor market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation might cause inflation expectations to become unanchored remained key factors shaping the policy outlook,” the minutes read.

Fed economists still expect a recession starting later this year, according to the policy meeting minutes.

The economic forecast put together by staff at the policy meeting “continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions” would trigger a “mild recession” later this year.“ The tepid downturn would then be ”followed by a moderately paced recovery.”

The minutes state that the real gross domestic product (GDP) was predicted to decelerate in the second and third quarters “before declining modestly” in the fourth quarter of 2023 and the first quarter of 2024.

“Real GDP growth over 2024 and 2025 was projected to be below the staff’s estimate of potential output growth. The unemployment rate was forecast to increase this year, peak next year, and remain near that level through 2025,” the minutes read.

Although there have been receding stresses in the banking system, meeting participants purported that it would be critical to watch for further developments in the financial sector and determine if more tightening of credit conditions will weigh on the U.S. economy.

“Some participants noted concerns about the potential risks stemming from weakness in commercial real estate,” the minutes read.

Financial markets barely reacted to the news, as the leading benchmark indexes recorded modest losses on July 5.

The U.S. Treasury market was mixed, with the benchmark 10-year yield up more than 8 basis points to above 3.94 percent. The one-month bill was flat, trading below 5.2 percent.

The U.S. Dollar Index, which measures the greenback against a basket of currencies, firmed above 103.

Where Fed Officials Stand

Despite the Summary of Economic Projections data (pdf) showing that officials anticipate two more rate hikes this year to lift the median policy rate to 5.61 percent, not everyone thinks the institution needs to keep raising interest rates.

Atlanta Fed Bank President Raphael Bostic told the Irish Association of Investment Managers annual dinner in Dublin in June that there’s no need to boost the fed funds rate again this cycle unless the economic landscape experiences unexpected changes.

Mr. Bostic noted that he sees the cumulative effects of the central bank’s rate hikes since March 2022 “showing up” in the U.S. economy, saying that the Fed was enjoying progress on the inflation front.

“Now, let me be clear what I mean by ‘pause.’ My view is that we have reached a level of the nominal federal funds rate that should be sufficient to move inflation toward the 2 percent target over an acceptable timeframe,“ he said. ”I realize this suggests a definition of ‘pause’ that brings with it an expectation of no further hikes unless things fail to go according to plan. That’s my baseline case.”

President and CEO of the Federal Reserve Bank of Atlanta Raphael W. Bostic speaks at a European Financial Forum event in Dublin on Feb. 13, 2019. Clodagh Kilcoyne/Reuters

Chicago Fed Bank President Austan Goolsbee said in an interview with Fox Business on June 30 that more data would be needed to determine if the Fed should pull the trigger on a rate hike or hit the pause button for the second consecutive meeting.

“The thing that everybody should put their eye on in the immediate term is, are goods prices, inflation, is it too high for one-off reasons—like used cars were especially high but that’s going to go away—or is there something more persistent?” Mr. Goolsbee told the business news network on June 30.

He noted that he had yet to make a decision on the next policy decision at the July 25–26 FOMC meeting.

But Fed Chair Jerome Powell signaled that more restriction of monetary policy is ahead, noting that he wouldn’t take rate hikes at “consecutive meetings off the table.”

“We’ve now moved up to where we actually are in restrictive territory, but we haven’t been there very long,” Mr. Powell said at a European Central Bank forum in Portugal on June 28. “We believe there’s more restriction coming.”

Incoming Data

A lot of economic data will be released heading into the Fed gathering later this month.

The June nonfarm payrolls report will be published on June 7, with the consensus estimate showing 225,000 new jobs. The unemployment rate and annual average hourly wage growth are forecast to dip to 3.6 percent and 4.2 percent, respectively.

Consumer inflation figures will be released on July 12. According to the Cleveland Fed Bank’s Inflation Nowcasting model, the annual consumer price index is expected to ease to 3.2 percent. Core inflation, which strips the volatile energy and food components, is projected slow to 5.1 percent.

The Fed’s preferred inflation measurement—core personal consumption expenditures—is projected to slow to 4.4 percent.

June retail sales numbers are scheduled to come out on July 18. Trading Economics is forecasting 0.2 percent growth, but retail sales ex-automobiles and gasoline are expected to fall by 0.3 percent.

Following the FOMC decision, the Bureau of Economic Analysis will report the second-quarter GDP growth rate. The Atlanta Fed’s GDPNow model estimate suggests that the U.S. economy expanded by 1.9 percent in the April-to-June period.