Fed officials were wary of slow inflation progress at the June meeting

Federal Reserve officials were concerned about slow progress toward lower inflation and looked warily at the surprising staying power of the US economy at their June meeting — so much so that last month some even wanted to raise interest rates rather than hold them as the central bank eventually did, minutes from the meeting showed.

Fed officials decided to leave interest rates unchanged at their June 13-14 meeting to give themselves more time to see how the 10 consecutive hikes they previously made affected the economy. At the same time, they released economic forecasts suggesting they would raise rates twice more this year.

The minutes of the meeting, released Wednesday, offered more details about the debate leading up to that decision — underlining that Fed officials were divided on how the economy was shaping up and what to do about it.

While “nearly all” Fed officials thought it was “appropriate or acceptable” to leave rates unchanged in June, “some” favored rate hikes or “could have supported such a proposal” given continued strength in the labor market , the continued momentum in the economy, and “few clear signs” of inflation getting back on track, the minutes showed.

“Almost all participants stated that, with inflation still well above the Committee’s long-term target and the labor market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation could cause inflation expectations to become unanchored were key factors these remain the policy outlook,” the minutes said.

The minutes underlined what a difficult time this is for the Fed. Inflation has fallen significantly overall, but that’s partly because food and fuel prices are cooling. An inflation measure that strips out those volatile categories – known as core inflation – makes much more inhibitory progress. That has caught the attention of the Fed, especially given signs that the broader economy is doing well.

“Core inflation has not slowed permanently since the beginning of the year,” Fed officials noted at the meeting, according to the minutes, noting “generally” that consumer spending was “higher than expected.” Officials reported hearing a flurry of reports from companies as some saw weaker economic conditions and others reported “greater than expected strength.”

Officials noted that price increases for goods — physical purchases such as furniture or clothing — have been moderate, but slower than expected in recent months. While rental inflation was expected to continue to cool and help lower headline inflation, “some” officials feared it would fall less decisively than hoped amid a low stock of homes for sale and a “less-than-expected delay” recently in rents for leases signed by new tenants. “Some” Fed officials noted that other service pricing “showed little sign of slowing down in recent months.”

Fed officials, the economists and analysts who inform Fed officials who set policy, continued to expect a mild recession to begin in late 2023 and extend into early next year, the Fed’s minutes showed. But they saw “the possibility that the economy will continue to grow slowly and avoid a recession that is almost as likely as the baseline of a mild recession.”

Since the Fed meeting, officials have taken a watchful stance. Fed chairman Jerome H. Powell said during a speech last week in Madrid that he would expect rate hikes to continue at a slower pace – but he didn’t rule out that officials could return to back-to-back interest rate moves .

“We’ve had one meeting where we didn’t move, so that’s a moderation of pace in a sense,” he explained. “So I would expect something like this to continue, assuming the economy develops as expected.”

The question for investors is what would prompt the Fed to return to a more aggressive rate hike path — or, on the other hand, what would prompt officials to delay future rate hikes.

Policymakers have made it clear that the course for rate hikes may change depending on what happens to the economy. If inflation shows signs of persistence, the labor market is unexpectedly strong and consumer spending continues to rise, that could indicate that even higher interest rates are needed to cool household and corporate spending to a point where companies are forced to to stop prices soaring.

Conversely, if inflation falls rapidly, the labor market cools and consumers pull back sharply, the Fed may feel more comfortable delaying future rate hikes.

For now, investors expect the Fed to raise interest rates against the July 25-26 meeting. And economists will keep a close eye on new labor market data released on Friday for the latest evidence of how the economy is evolving.