Federal Reserve officials were divided at their last policy meeting on what the central bank’s next move should be on interest rates, with several officials leaning toward a pause and many officials wanting to keep options open given uncertainty about the outlook.

“Participants generally expressed uncertainty about how much more policy tightening may be appropriate,” according to minutes from the early May meeting of Federal Open Market Committee (FOMC), the Fed committee that decides on policy.

“Many participants focused on the need to retain optionality after this meeting.”

There were "several" FOMC members at the early May meeting who noted that if economic growth clocks in slower, as they expect, then more rate hikes after the last meeting may not be necessary.

But "some" officials felt more rate hikes would likely be needed based on their expectations that the process of bringing inflation back down to the Fed’s 2% target would be slow.

Market predictions

The Fed at its last meeting raised the target range for its benchmark interest rate by 0.25%, to its highest level since September 2007. The move pushed the fed funds rate to a new range of 5%-5.25%.

As part of its most aggressive rate hiking campaign since the 1980s, the US central bank has increased the target range for its benchmark interest rate by 5 percentage points since March 2022.

More information about prices has emerged since the last meeting that convinced some market observers that a pause in rates was now likely, especially the release of the Consumer Price Index data that showed inflation pressures remain elevated in the US economy.

Core CPI was up 5.5% in April from a year before and has been more or less steady in 2023, while down from around 6% a year ago.

After that CPI announcement on May 10, markets priced in a nearly 100% chance of a pause at the Fed's June meeting. As of Wednesday afternoon, markets had priced in a 72% chance of a pause in June.

The latest read on the Fed's favored inflation gauge, personal consumption expenditures, is due out Friday morning.

Almost all officials said at the meeting in early May that with inflation still well above the Fed’s 2% target and the job market remaining strong, upside risks to the inflation outlook remained a key factor shaping the policy outlook.

'Meeting by meeting'

Some Fed officials have clarified their latest thinking in recent days.

Fed Chair Jerome Powell said Friday he is still keeping options open, emphasizing that future decisions on interest rate moves will be made on a "meeting by meeting" basis.

He also said rates may not need to rise as high as previously expected as a banking crisis tightens credit conditions, even with inflation well above the Fed's 2% target.

St. Louis Fed President James Bullard earlier this week said he thought the Fed should do two more rate hikes, and Fed Governor Christopher Waller said Thursday he doesn’t think the Fed should stop raising interest rates until there is clear evidence inflation is cooling. Waller noted he too is uncertain about what to do in June.

Dallas Fed President Lorie Logan said last week that as of right now a pause is not in order, though that could change in the coming weeks depending on incoming data.

Banking stresses and the debt limit

There was a discussion of the recent turmoil in the banking industry during the meeting in early May, according to the FOMC minutes released Wednesday

Officials said they saw broad improvement in the banking sector. They expected that stress from several bank failures would further weigh on the economy, but by how much was still uncertain.

Many at the meeting thought the bank failures had contributed to some tightening in lending standards, especially among small and mid-sized banks. Some mentioned that access to credit had not yet appeared to have declined “significantly” while others expected tighter lending standards to weigh further on companies’ spending plans.

Almost all officials said that with inflation still well above the Fed’s 2% target and the job market remaining strong, upside risks to the inflation outlook remained a key factor shaping the policy outlook.

Officials also discussed the debt limit, with some concerned it won’t be raised in time. Many officials felt it “essential” that the debt limit be raised in a timely manner to avoid the risk of inflicting severe harm to the financial system and the broader economy.

A number of members emphasized that the Fed should be ready to use its liquidity tools, as well as its regulatory and supervisory tools, if there is a breach of the debt limit.

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