The Fed provided a lot of information about its thinking on the day of the meeting through the FOMC statement, Chair Powell's press conference, and the Summary of Economic Projections (SEP). As is usually the case, we did not find anything too surprising in the minutes, but they still provide useful details on the conversations that took place at the meeting.
One thing that is clear from the minutes is that at one point, the FOMC was prepared to raise the "dots," which indicate expectations for the future path of Fed policy rates, by a considerable amount. This was based on the strength of the economic data published since the previous SEP in December, especially regarding inflation and the labor market. However, the developments in the banking system created a lot of additional uncertainty over the outlook. The FOMC was anticipating that credit tightening would have a negative impact on economic activity and inflation, especially considering that the rate hikes the Fed had previously implemented were already weighing on business investment. They also thought that there could be an impact on consumer sentiment that could lead to restraint on spending. As we noted at the time of the meeting, the forecasts in the SEP were quite pessimistic. In the end, the median dot for 2023 was left unchanged at 5.1%, corresponding to one more 25-basis-point rate hike from the current level. Regarding the decision to hike rates itself, some FOMC members said that, before the developments in the banking system, they would have considered a 50-basis-point hike.
The minutes make it clear that the Fed itself is uncertain over how many more rate hikes it will implement. At the time of the meeting, FOMC participants felt that the actions by the Fed and other government agencies had helped to calm tensions in the banking system. Given recent developments, we would not expect the banking system to prevent the Fed from hiking if they thought it was needed to bring inflation down. However, some recent economic data, including this morning's inflation report, suggests to us that the Fed is likely close to the end of the rate hiking cycle.
Main contributor - Brian Rose
Content is a product of the Chief Investment Office (CIO).
Original report - FOMC minutes reflect banking system uncertainty, 13 April 2023.