The central bank also forecasts a “mild recession” in the second half of the year
Members of the US Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) were split over the amount of the 25 basis point rate hike they finally agreed to at their last monetary policy meeting. , held on May 2 and 3.
The members of the body disagreed on the amount that “would be necessary to reduce inflation in the midst of high uncertainty due to the impact of stress in the banking sector on the economy,” according to the minutes of that meeting.
On the one hand, “some” participants stated that “if the economy performed according to their current forecasts, then perhaps additional monetary tightening would not be necessary” after the May hike.
On the contrary, other members maintained that their estimates showed that “progress to return inflation to 2% could continue to be intolerably slow”, and therefore called for further increases in the future.
In any of the cases, “many members were firm in the imperative of maintaining optionality” and being flexible when updating the monetary policy of the world’s leading power in June.
The Fed has also advanced in its forecasts that the restrictive effects that have not materialized yet to access credit as a result of the current monetary policy, added to “financial conditions that are already adjusted”, will translate into a “mild recession” in the second half of this year, which will be followed by a “moderate-paced recovery.”
On the other hand, the Fed also addressed the current problem of the debt ceiling, which is at an ‘impasse’ due to the disagreement between Democrats and Republicans to renew it. If not done on time, the United States could go into default, which the Fed said “threatens major disruptions to the financial system and tighter financing conditions that weaken the economy.”
The US Secretary of the Treasury herself, Janet Yellen, has referred to this issue today to verify that she considers it “highly probable” that the country will not be able to meet its payment obligations as of June if Congress does not act to raise the limit of indebtedness.
“It is very likely that we will exhaust all our resources to meet the government’s obligations at the beginning of June or even as soon as June 1,” he declared at an event organized by the ‘Wall Street Journal’. “We no longer see it as very feasible that our resources will allow us to reach the middle or end of June,” he added.
DOWNWARD FINANCIAL TENSIONS
Likewise, the minutes have revealed that the tensions in the financial markets have “tempered somewhat” since the last meeting, since the perspectives of investors on the banking system “have stabilized”.
“Deposit outflows from small and medium-sized banks virtually ceased at the end of March and April. Although the shares of regional entities continued to fall during this period, most of these declines seemed to mainly reflect lower profitability expectations than concerns for solvency,” the Fed explained.
LAST INCREASE IN RATE
On May 3, the Fed already decided to approve an interest rate rise of 25 basis points, until placing them in a target range of between 5% and 5.25%.
Unlike on other occasions, the US monetary authority did not mention at that time that more interest rate increases would still be necessary to subdue the rise in prices and return inflation to around 2%. In this way, we could find ourselves facing a possible pause in the increases ahead of the next meeting on June 14.