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Fed divided on monetary policy, minutes reveal

By Charbel Kadib
4 minute read

A group of the central bank’s board members needed to be convinced to support a monetary policy pause, according to newly released minutes.

The Federal Open Market Committee (FOMC) has published minutes from its latest monetary policy board meeting on 12–13 June, in which it opted to maintain a funds rate of 5–5.25 per cent.

Following its decision, the board said the “skip” would allow for more time to “assess additional information” relating to the overall trajectory of the US economy.

Recent indicators, the FOMC added, suggest the economy has “continued to expand at a modest pace”, pointing to “robust” jobs numbers and continued inflation stickiness.


But concerns over the longer-term stability of the US banking system, following three collapses in March and April, and signs of a tightening in credit conditions have clouded the Fed’s monetary policy outlook.

However, minutes released on Wednesday (5 July) revealed that while the ultimate decision to pause was unanimous, some members needed to be convinced to ease their tightening bias.

“Some participants indicated that they favoured raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal,” the minutes read.

These FOMC members flagged continued tightness in the labour market and resilient underlying demand in the US economy.

“The participants favouring a 25 bps increase noted that the labour market remained very tight, 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 per cent objective over time.”

Nonetheless, markets are expecting further hikes from the Federal Reserve over the coming months, given headline inflation remains well above the target range.

According to the latest US consumer price index (CPI), headline inflation eased to 4 per cent in the 12 months to 31 May 2023.

The FOMC updated its forward guidance for monetary policy following its last meeting, with median projections for the terminal funds rate increasing to 5.6 per cent.

This shifted in line with updated expectations for US GDP growth, inflation, and unemployment.

Real GDP is now expected to grow 1 per cent (revised up from 0.4 per cent), the unemployment rate is tipped to end the year at 4.1 per cent (revised from 4.5 per cent), and core inflation is tipped to moderate to 3.9 per cent (revised from 3.6 per cent).

As for the timing of future rate cuts, the median expectation among FOMC members is for rate cuts of over 100 bps over the course of 2024, before dropping to 2.5 per cent over the longer term.

In Australia, the Reserve Bank’s latest monetary policy determination resembled the Fed’s posture, with the central bank keeping the cash rate on hold at 4.1 per cent.

In its post-meeting statement, RBA said the pause would allow “some time to assess the impact of the increase in interest rates to date”, as well as broader macroeconomic developments amid continued “uncertainty”.

However, analysts are expecting the central bank to continue tightening monetary policy, with at least one additional 25 bps hike expected in either August or September.

This would take the terminal cash rate to at least 4.35 per cent, however, other senior economists (including representatives from three of the big four banks) continue to project a peak cash rate of 4.6 per cent.

AMP Capital chief economist Shane Oliver — who joined ANZ, NAB, and Westpac in projecting a terminal rate of 4.6 per cent — has said the RBA would likely begin cutting rates in February 2023 in response to a significant easing in aggregate economic activity.

Mr Oliver, along with peer economists at the Commonwealth Bank, has put the odds of recession at 50 per cent.

But RBA remains confident it can navigate the “narrow path” — returning inflation to the 2–3 per cent target range without tipping the economy into recession.

Fed divided on monetary policy, minutes reveal

A group of the central bank’s board members needed to be convinced to support a monetary policy pause, according to newly released minutes.

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