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Several Federal Reserve officials considered forgoing an interest rate rise last month amid the worst banking turmoil since the 2008 crisis, but ultimately decided to press ahead due to persistently high inflation, according to an account of their most recent meeting.
Minutes from the March gathering, at which the US central bank raised its benchmark policy rate by a quarter-point, showed the Fed was chiefly focused on persistent price pressures — even after the recent banking turbulence upended expectations about the trajectory of the economy.
The rate rise, which lifted the federal funds rate to a new target range of 4.75-5 per cent, came on the heels of a trio of bank failures in the US as well as the forced takeover of Credit Suisse by UBS.
Government authorities including the Fed stepped in aggressively to ward off further contagion, injecting doubt as to whether the central bank would follow through with a rate rise in March.
The Fed officials who considered a pause noted that it would give them more time to assess the effect of the banking stress on the economy and financial system, the minutes showed. Their deliberations came as Fed staffers for the first time predicted a “mild recession” starting later this year before the economy recovers over the next two years.
However, the officials in question decided the Fed and other agencies had done enough to “calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation”. They cited high inflation and strong economic data as reasons for pressing ahead with the rate increase.
During the press conference that followed the March decision, chair Jay Powell acknowledged officials had considered pausing the monetary tightening campaign.
But he said policymakers had decided it was more important for the Fed to maintain public confidence in its commitment to rooting out high inflation “with our actions as well as our words”.
Before the turbulence engulfed the banking sector, Powell had even floated the idea of reverting to a half-point rate rise following a number of unexpectedly strong economic data that suggested more work needed to be done to damp demand.
According to the minutes, some officials said they would have considered a half-point rate rise “in the absence of the recent development in the banking sector”.
“However, due to the potential for banking sector developments to tighten financial conditions . . . they judged it prudent to increase the target range by a smaller increment at this meeting,” the record said.
In future, several participants said the Fed needed to “retain flexibility and optionality” given the “highly uncertain economic outlook”.
For the most part, officials expect the banking stress will lead to tighter credit conditions, which could weigh on business activity, hiring and consumer spending. That has altered expectations about how much more the Fed needs to cool economic activity. Powell last month likened a looming credit crunch to the Fed’s rate rises in its ability to squeeze the economy but said the magnitude of any tightening effect was highly uncertain.
To account for this, the Federal Open Market Committee changed its policy statement, removing the oft-repeated warning that “ongoing increases” would be necessary to bring soaring inflation under control.
Rather, the committee said “some additional policy firming may be appropriate” to bring inflation back to the bank’s 2 per cent target. Powell later urged reporters to focus on the “some” and “may” in that phrase.
Prior to the banking turmoil, many officials saw the policy rate path being “somewhat higher” than earlier estimates in light of stronger than expected data, the minutes indicated.
Still, most officials pencilled in one final quarter-point rate rise this year, per projections published last month, which would lift the fed funds rate above 5 per cent and maintain that level at least until 2024. Officials have insisted there would be no rate cuts in 2023.
In recent appearances, most Fed officials have signalled support for one more rate increase, but divisions have emerged.
Speaking on Wednesday, Mary Daly, president of the San Francisco Fed, said she would be monitoring the effect of the banking stress closely but that “the strength of the economy and the elevated readings on inflation suggest that there is more work to do”.
That followed comments from John Williams, president of the New York Fed, who on Tuesday said another rate rise was a “reasonable starting point” given there had not yet been a significant tightening of credit conditions.
However, Austan Goolsbee, the newly appointed president of the Chicago Fed, recently adopted a much more cautious tone, warning of a “material impact on the real economy” that could suggest monetary policy “has to do less” than initially expected.
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