Many central bank officials considered keeping rates on hold in March, but ultimately agreed to a hike

WASHINGTON, April 12 (Reuters) – Several Federal Reserve officials at the U.S. central bank’s policy meeting last month considered pausing interest rate hikes until it was clear that the failure of two regional banks would not cause broader financial stress. was a priority.

According to minutes of the Federal Open Market Committee’s March 21-22 meeting, released Wednesday, “several participants … considered whether it would be appropriate to keep the target range steady at the meeting” to assess how financial sector developments could affect lending and the path of the economy.

The failures of Silicon Valley Bank and Signature Bank pushed a group into an unexpectedly complicated debate, but ultimately they decided to move forward with higher interest rates, in line with Fed Chairman Jerome Powell’s comments after the meeting that interest-rate policy would be the oversight and liquidity tools used to keep the financial sector stable from turmoil. Let go and focus on inflation.

Indeed, actions taken by US policymakers and the central bank “helped to calm conditions in the banking sector and reduce near-term risks to economic activity and inflation,” the minutes said, and supported a quarter-percentage-point rate cut. The increase comes despite fresh uncertainty surrounding the financial sector.

U.S. stocks were flat after the release of minutes earlier in the day, following some encouraging signs in a U.S. government report that inflation is slowing. The U.S. dollar was little changed against a basket of currencies as U.S. Treasury yields fell.

Investors were betting on another Fed rate hike, although the May rate hike was still largely priced in.

“Minutes from the Federal Open Market Committee’s March meeting point toward another rate hike in May, but it will be a close call and there will be disagreements,” Oxford economists said.

Focus on inflation

The banking sector has stabilized since last month, although central bank officials are closely watching for signs of tightening credit conditions, which could result in them pausing their hiking campaign sooner than previously expected.

The minutes expressed such concern that pressures in the financial sector “will cause a slowdown in bank lending, which will not be reflected in more general indicators of financial conditions,” with market communications reporting to the central bank.

Inflation, meanwhile, remained above the central bank’s 2% target, and participants acknowledged that the latest data provided few signs that inflationary pressures are easing fast enough to return inflation to the central bank’s target.

“Participants noted that inflation was too high and the labor market too tight; as a result they expected that some additional policy stabilization would be appropriate,” the minutes said.

Indeed “some participants indicated … they would have considered a 50-basis-point increase … had it not been for recent developments in the banking sector,” the minutes said.

Policymakers weakened their commitment to further rate hikes at the March meeting, dropping the need for “continuing increases” from the policy statement in favor of saying “some further” tightening would be needed.

They also acknowledged that recent banking developments will factor into monetary policy decisions to the extent that “these developments affect employment and inflation and risks around the outlook”.

Report by Howard Schneider; Additional reporting by Lindsey Dunsmuir and Ann Safir; Editing by Paul Simao

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