Fed file image: Chair Powell answers reporters' questions at the FOMC press conference on May 3, 2023.

Here are the Minutes of the Federal Open Market Committee May 2–3, 2023, emphasis mine.

Key Paragraphs

Market participants broadly expected a 25 basis point rate increase at the May meeting and saw the resulting rate as the likely peak for the current tightening cycle. Survey respondents assigned a much higher probability to the peak federal funds rate being between 5 and 5.25 percent than they did in March. However, respondents still assigned a substantial probability that the peak rate may turn out to be above 5.25 percent. Respondents expected the peak rate to be maintained through the January 2024 FOMC meeting. 

Although CRE [Commercial Real Estate] loan growth on banks’ balance sheets remained robust in the first quarter, the April SLOOS [Senior Loan Officer Opinion Survey on Bank Lending] indicated that loan standards across all CRE loan categories tightened further in the first quarter. The reported tightening in standards over the first quarter was particularly widespread for mid-sized banks. Banks also reported that they expected to tighten CRE standards further over the remainder of the year, with mid-sized banks very broadly reporting this expectation. Meanwhile, commercial mortgage-backed securities (CMBS) issuance was very slow in February and March, amid higher spreads and volatility as well as tighter lending standards. 

Overall, the credit quality of most businesses and households remained solid but deteriorated somewhat for businesses with lower credit ratings and for households with lower credit scores. The credit quality of C&I and CRE loans on banks’ balance sheets remained sound as of the end of the fourth quarter of last year. However, in the April SLOOS, banks frequently cited concerns about a deterioration in the quality of their loan portfolios as a reason for expecting to tighten standards over the remainder of the year.

Valuations in both residential and commercial property markets remained elevated. Rising borrowing costs had contributed to a moderation of price pressures in housing markets, and year-over-year house price increases had decelerated. The staff noted that the CRE sector remained vulnerable to large price declines. This possibility seemed particularly salient for office and downtown retail properties given the shift toward telework in many industries.

The staff also noted analysis that found that while losses to CRE debt holders could be moderate in aggregate, some banks and the CMBS market could experience stress should prices of these properties decline significantly.

Participants agreed that inflation was unacceptably high. They commented that data through March indicated that declines in inflation, particularly for measures of core inflation, had been slower than they had expected. 

Participants noted that risks associated with the recent banking stress had led them to raise their already high assessment of uncertainty around their economic outlooks. Participants judged that risks to the outlook for economic activity were weighted to the downside, although a few noted the risks were two sided. 

Six Key Points 

1. Higher for longer, the Fed thinks it will hold the terminal rate constant all the way through January of 2024.
2. CRE loan growth slow, SLOOS shows concerns about a deterioration in the quality of loan portfolios. The CMBS market could experience stress should prices of these properties decline significantly.
3. Valuations in both residential and commercial property markets remained elevated. 
4. Inflation was unacceptably high. Declines in inflation, particularly for measures of core inflation, slower than they had expected. 
5. Banking stress increases the already high assessment of uncertainty.
6. Outlook for economic activity were weighted to the downside.

The market still has a rate cut earmarked for December despite these minutes. Someone is wrong. 

I will update the market's perceived odds at the end of the day or early tomorrow.

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