The May FOMC meeting minutes suggest the increasingly uncertain economic outlook, along with concerns over a potential credit crunch and risk of a contentious debate over the debt ceiling, pushed the Fed to adopt a more measured approach to further potential rate hikes with “participants generally express[ing] uncertainty about how much more policy tightening may be appropriate.”

Among the sources of uncertainty emphasized in the minutes, the extent to which credit conditions will tighten, the cumulative effects of the 500bp of Fed tightening since March 2022, and increasing concerns over the persistence of inflation feature prominently.

The minutes also underscore the mounting disagreement between doves on the committee who would prefer to hold rates at their current level, and Fed members who think the policy rate is still not sufficiently restrictive.

Minutes reflect a wide range of views across the committee, that will be debated at the June 13-14 meeting. Some participants indicated that under their expectations that disinflation could be a drawn-out process and “unacceptably slow,” further rate hikes will be warranted. On the other hand, several participants noted that if the economy evolved according to their baseline outlooks, “further policy firming after this meeting may not be necessary.”

These differing views, which have been echoed in public comments by both hawks and doves on the FOMC since the May meeting, reflect the ongoing internal debate over whether to pause, skip, or hike in June. Chair Powell endorsed the notion that risks around further rate hikes have become more balanced at a May 19 Brookings Institution panel, suggesting the Fed will maintain its data-dependent tilt.

Lingering concerns over a sharp tightening in credit conditions, and the observation from “some” participants that “past years’ tightening was beginning to have its intended effect” may steer the Fed toward holding the policy rate steady in June to assess how the economy and inflation evolve, before potentially hiking again later in Q3.

The Fed’s June meeting will be associated with publication of the Fed’s updated quarterly Summary of Economic Projections, that will include estimates of the appropriate year-end policy rates in 2023-2025. The previous projections, published in association with the March 21-22 meeting, indicated that the median Fed member forecast a 5.1% year-end policy rate for 2023, although there was significant dispersion around the median, with seven Fed members in favor of an even higher rate.

Should inflation and labor market data over the next few weeks continue to point to entrenched inflationary pressures and robust labor markets, the Fed could use its economic projections to signal rates are likely to move higher even if it holds the policy rate steady in June.