The debate over pausing at the Fed was intense, minutes show

Fed officials vigorously debated whether to hike rates again or hold them steady, according to minutes from the most recent meeting, released Wednesday.

When the dust settled, officials came to a consensus and voted unanimously to pause the central bank's most aggressive rate-hiking campaign in decades - allowing them time to reassess the economy and the effects of banking stresses on credit availability.

They "judged that it was still too early to assess with confidence the eventual effects of tighter bank credit conditions" and said "it would be important to monitor closely the potential effects of banking-sector developments on credit conditions and economic activity," according to the minutes. The release also showed officials frequently voiced the upside potential and downside risks to the economy.

Translation: The decision to pause came after a debate.

The Fed held its key federal funds rate steady at a range of 5-5.25%, snapping a streak of 10 consecutive rate hikes since the Fed began lifting rates in March 2022. In a post-meeting news conference, Fed Chair Jerome Powell said the pause was a "prudent" move that would give the central bank time to assess the economy after rapid rate increases.

However, officials have made it clear in recent speeches they're not done raising interest rates just yet - and there might be as many as two more quarter-point rate increases this year, according to the Fed's latest Summary of Economic Projections.

"Even with their respective differences both sides of the FOMC view higher rates as likely in order to quell inflationary pressures and restore price stability," wrote Quincy Krosby, chief global strategist at LPL Financial, in analyst note.

In fact, some officials indicated that they would have supported another quarter-point hike last month.

"The participants favoring a 25 basis point increase noted that the labor market remained very tight, momentum in economic activity had been stronger than earlier anticipated, and there were few clear signs that inflation was on a path to return to the Committee's 2 percent objective over time," the minutes said.

In recent remarks, Powell said inflationary pressures persist in the labor-intensive services sector, which includes hospitals and restaurants.

Overall inflation has retreated in the past several months, but core inflation - an inflation measure that excludes volatile food and energy prices - hasn't decelerated as fast. The Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, rose 3.8% in May from a year earlier, down from April's 4.3% rise.

Meanwhile, the core measure inched down to 4.6% from 4.7% during the same period, a slower deceleration, though it landed at its lowest point since October 2021.

While it's clear that officials remain determined to defeat inflation, it's not clear when officials plan to hike rates again. The June jobs report to be released Friday will be a key piece of data that will inform officials for their decision later this month.

Top economists have argued that the tight labor market has been a persistent source of inflation because of how much higher labor costs have weighed on service providers, such as restaurants and hospitals.

The Fed wants to see the labor market, which include monthly job and wage gains, slow to a pace that's consistent with 2% inflation. Government figures have shown a still-strong labor market, but some Fed officials at last month's June meeting noted that private-sector data "suggested that job growth may have been weaker than indicated by payroll employment," according to the minutes.

The job market has held remarkably steady despite the Fed's most aggressive rate hiking campaign in decades. Employers added 339,000 jobs in May, a historically robust gain, while the unemployment rate edged up to a low 3.7% that month, though there have been some signs of slowing momentum. Job openings are down from their record high last year and the rate of quitting has slowed to near pre-pandemic levels.

The Fed is also highly attentive to data gauging consumer demand.

Consumer spending has cooled in the past several months, according to figures from the Commerce Department. A slew of other factors are expected to weigh on consumers in the months ahead, such as the resumption of student loan payments and the Supreme Court blocking President Joe Biden's student loan forgiveness program. Americans are also running down their savings accounts while racking up debt, so US consumers might just tap out at some point.

Fed economists reaffirmed their expectation of a mild recession later this year, but just barely.

"Given the continued strength in labor market conditions and the resilience of consumer spending, however, the staff saw the possibility of the economy continuing to grow slowly and avoiding a downturn as almost as likely as the mild-recession baseline," the minutes showed.