U.S. FOMC Meeting Minutes (May 2-3, 2023)

Fed minutes depict uncertainty surrounding future rate hikes

• The minutes from the May 2-3 Federal Open Market Committee (FOMC) meeting reiterated that curtailing inflation remains the principal objective of the Fed. 
• On the current state of the economy, the Committee members noted that "economic activity had expanded at a modest pace in the first quarter. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system was sound and resilient."
• When discussing credit conditions, participants noted that, "stress in the banking sector would, in coming quarters, likely induce banks to tighten lending standards by more than they would have in response to higher interest rates alone." Participants noted however, that the economic impact was uncertain at this time. 
• On the future path of monetary policy, committee members stated that "in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain." Several participants noted however, that if the economy progressed in line with their current projections, future rate hikes may not be warranted. 
• When discussing factors that could weigh on future policy decisions, participants cited, "the degree and timing with which cumulative policy tightening restrained economic activity and reduced inflation, with some participants commenting that they saw evidence that the past years’ tightening was beginning to have its intended effect."

Key Implications

• Today's minutes confirmed that additional rate hikes will depend on the incoming data. Despite showing some early signs of easing, inflation remains well-above target while the economy continues to add jobs at an above trend pace. This has created diverging views on the future path for the fed funds rate among FOMC members. Financial markets have adjusted their view for the fed funds rate expecting approximately 50 basis points in rate cuts by year end, versus 75 basis points two weeks ago. This uncertainty has been reflected in the volatility of the U.S. 2-year Treasury, which has gained more than 50 basis points since the beginning of May.  
• While tighter credit conditions stemming from the recent stress in the banking sector are expected to weigh on economic growth, the full impact remains somewhat uncertain. It is for that reason that the FOMC will likely pause on its tightening campaign when they meet next month, as they try and better gauge the cumulative impact of the 500 basis points of tightening done over the last year.    

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.