By Nick Timiraos
WASHINGTON -- Most Federal Reserve officials expected they would need to lift interest rates further this year after pausing increases last month, though some wanted to raise rates in June because the economy hasn't slowed enough.
Minutes of the June policy meeting, released Wednesday, offered nothing to dispel recent market expectations of a rate increase this month to combat inflation.
The Fed last month held its benchmark federal-funds rate steady in a range between 5% and 5.25%, its first pause after 10 consecutive increases since March 2022, when officials raised it from near zero.
All 11 voting members of the policy-setting Federal Open Market Committee agreed to last month's decision. "Almost all participants judged it appropriate or acceptable" to hold rates steady given how quickly the Fed has raised rates and because those moves take time to influence economic conditions, the minutes said.
But the minutes suggest several of the 18 voting and nonvoting officials at the June meeting would have agreed to raise rates then. Some of them favored or could have supported a rate increase, the minutes said, because " momentum in economic activity had been stronger than earlier anticipated, and there were few clear signs that inflation was on a path to return to the committee's 2% objective over time."
The minutes used the word "resilient" or "resilience" 11 times to describe the U.S. economy, financial markets or banking system.
Officials at the June meeting penciled in two more increases this year, and the minutes said that projection would be a valuable tool in shaping public expectations about the need to lift rates further to bring inflation down to the Fed's 2% target.
The Fed boosted interest rates aggressively in 2022 and then slowed the pace in December and February.
Holding rates steady in June offered a way to further dial down the pace of increases and better study the effects of those rapid moves, Fed Chair Jerome Powell said at a conference in Portugal last week.
Nevertheless, greater economic resilience could require the Fed to continue hiking rates, he said. "Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough," Powell said.
Ahead of the release of the minutes, investors in interest-rate futures markets saw an 88% chance that the Fed would raise rates to a range between 5.25% and 5.5% this month, according to CME Group. That would be a 22-year high.
The Fed's rate increases aim to slow the economy by raising the cost to borrow and reducing asset values. Officials became less certain about how high to raise rates after three bank failures this spring raised concerns about a tighter credit crunch.
Inflation and economic activity didn't ease as much during the first half of 2023 as Fed officials and many private-sector economists expected. Layoffs retreated last week, adding to evidence of a solid labor market, and the government said economic growth was stronger than previously estimated in the first quarter.
At the same time, consumer prices and spending rose more slowly in May. The Fed's preferred inflation measure, the personal-consumption expenditures price index, rose 3.8% from a year earlier, its slowest pace in two years, the Commerce Department said last week.
Powell spoke the day ahead of the Commerce report. "We've all seen inflation be, over and over again, more persistent and stronger than we expected. At some point that may change, and I think we have to be ready to follow the data and be a little patient as we let this unfold," he said.
Powell has kept the rate-setting committee united since inflation surged more than two years ago, with only one dissent since the central bank started unwinding its pandemic-era stimulus in late 2021. The minutes hinted at potentially greater difficulty in maintaining such unity in the coming months.
Some have said the Fed shouldn't continue to raise rates. The central bank should "wait and let our policy work," Atlanta Fed President Raphael Bostic told reporters in Ireland last week. "I don't see as much urgency to move as stated by others, including my chair." Bostic isn't a voting member of the FOMC this year.
The minutes show the Fed's influential staff, who in March expected a recession would begin later this year, maintained that forecast in June. But the staff last month also saw the possibility of avoiding such a downturn to be "almost as likely" due to continued strength in labor markets and consumer spending.
The Labor Department is set to release its June employment report on Friday.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
July 05, 2023 16:35 ET (20:35 GMT)
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