Federal Reserve officials saw the economy holding strong despite high inflation and rising threats to the global economic outlook before hiking interest rates earlier this month, according to minutes released by the central bank Wednesday.
During the May 3 and May 4 meeting of the Federal Open Market Committee (FOMC), the Fed panel responsible for setting interest rates and other monetary policy tools, officials voiced confidence in the resilience of the U.S. economy as the central bank ramps up its battle against inflation. Even so, Fed officials also saw several risks to the U.S. economy and the bank’s bid to bring inflation down without causing a recession looming on the horizon, according to minutes from the meeting.
“Members agreed that, although overall economic activity had edged down in the first quarter, household spending and business fixed investment had remained strong. Job gains had been robust in recent months, and the unemployment rate had declined substantially,” the minutes read.
“Members also agreed that inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures,” the minutes added.
The FOMC capped off the May meeting with a 0.5 percentage point interest rate hike, twice the size of a typical increase, after raising its baseline interest rate range by 0.25 percentage points in March. The FOMC and Fed Chairman Jerome Powell, who spoke to reporters after the meeting, also said the Fed was likely to consider further 0.5 percentage point hikes at upcoming summits in June and July.
The minutes from the May meeting align largely with Powell’s message of cautious optimism in the strong but overheated economy and the bank’s ability to tame it. While Powell has warned the U.S economy could experience “pain” as borrowing costs rise, he and Fed officials believe a strong labor market and consumer spending can hold sturdy.
Fed officials “expected robust growth in consumption spending. They pointed to several elements supporting this outlook, including strong household balance sheets, wide availability of jobs, and the U.S. economy’s resilience in the face of new waves of the virus,” the minutes read.
“With respect to the business sector, participants cited robust consumer demand, healthy household balance sheets, and inventory rebuilding as factors supportive of business activity and investment,” the minutes added.
Consumer and business spending both remained strong in the first quarter of 2022 despite a technical decline in gross domestic product driven largely by a surge of exports. Even as interest rates rose and investors braced for high rate hikes, household and business spending remained sturdy, if slightly slower than the torrid pace set in 2021.
Fed officials also took comfort in the gain of roughly 1.7 million jobs in the first three months of the year and the presence of roughly two open jobs for every unemployed American as the bank moves to slow the pace of job growth.
Even so, Fed officials acknowledged several obstacles in the way of a smooth interest rate hiking campaign that could boost pressure on prices and hinder the economy.
While Fed officials said their business contacts saw price pressures easing in April, it was still too soon to know if inflation had peaked. Officials cited supply chain disruptions driven by lockdowns in China, energy and food price spikes caused by the war in Ukraine and quickly rising wages as the primary risks for higher inflation.
Fed officials acknowledged the bank may need to raise interest rates to levels meant to restrict the economy if inflation continued to rise, which a growing number of economists fear could cause a recession.