The Federal Reserve's latest minutes from its May 2-3 meeting revealed that officials are less certain about future rate hikes and prefer to maintain policy flexibility. The minutes indicated that the impact of the banking crisis, coupled with inflation running above trend, has made the extent of additional rate increases uncertain.
Following the previous meeting, the Federal Open Market Committee raised its benchmark rate to a range of 5% to 5.25%. However, the removal of language suggesting further policy firming may be appropriate signaled a potential pause. Federal Reserve Chairman Jerome Powell described this change as a "meaningful shift" but did not explicitly call for a pause.
While Powell has indicated that inflation remains a concern and a rate hike in June is not ruled out, he emphasized the need to consider the cumulative effects of previous rate hikes and the potential impact of the banking crisis on lending standards.
Several Fed members expressed the importance of maintaining flexibility in future policy decisions to respond to incoming data. Some believed that further policy firming would likely be necessary due to slow progress in returning inflation to the target, while others noted that if the economy evolves as expected, additional hikes may not be required.
Inflation remains a significant concern for Fed members, with some supporting the need for additional rate increases. The minutes emphasized the need to communicate that the post-meeting statement does not signal a likelihood of rate decreases this year or rule out further increases.
Although the odds of a pause in June have slightly decreased, currently standing at 65%, the path for future rate hikes remains uncertain given the ongoing banking crisis.
