US Federal Reserve Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee meeting on interest rate policy in Washington, US, May 1, 2024.
Kevin LaMarque | Reuters
Federal Reserve officials became more concerned about inflation at their latest meeting, with members saying they lacked confidence to move forward with lowering interest rates.
Minutes of the political meeting held April 30 – May 1. Federal Open Market Committee data released Wednesday underscores policymakers’ concerns about when the time will come to ease rates.
The meeting followed a slew of indicators that showed inflation was more resilient than officials had expected at the start of 2024. The Fed is targeting an inflation rate of 2%, and all indicators have shown that price growth is well ahead of this mark.
“Participants noted that while inflation has decreased over the past year, there has been no further progress in recent months toward achieving the Committee’s 2 percent goal,” the summary said. “The latest monthly data showed significant increases in both the goods and services components of price inflation.”
The minutes also showed that “various participants mentioned a willingness to tighten policy further if inflation risks materialize in such a way that such action becomes appropriate.” Several Fed officials, including Chairman Jerome Powell and Gov. Christopher Waller, said after the meeting they doubted a rate hike would be the next step.
The FOMC voted unanimously at the meeting to keep its benchmark short-term borrowing rate in the range of 5.25%-5.5%, a 23-year high where it has been since July 2023.
“Participants assessed that maintaining the current target range for the federal funds rate at this meeting was supported by interim data indicating continued strong economic growth,” the minutes said.
Since then, there have been some signs of gradual progress in inflation, with the Consumer Price Index for April showing inflation at 3.4% annually, slightly below March levels. Excluding food and energy, the core consumer price index was 3.6%, the lowest since April 2021.
However, consumer surveys indicate growing concern. For example, a survey of consumer sentiment conducted by the University of Michigan showed an annual forecast of 3.5%, the highest since November, while overall optimism fell sharply. A New York Fed survey showed similar results.
Stocks held in negative territory while Treasury yields mostly rose after the minutes were released.
Risk of higher inflation?
Fed officials at the meeting noted several risks to rising inflation, especially those related to geopolitical events, and noted the pressure that inflation puts on consumers, especially those at the bottom of the wage scale. Some participants said the rise in inflation earlier in the year could be due to seasonal distortions, although others argued that the “broad” nature of the steps meant they should not be “overly discounted”.
Committee members also expressed concern that consumers are turning to riskier forms of financing to make ends meet as inflationary pressures persist.
“Many participants noted signs that the finances of low- and middle-income households were increasingly coming under pressure, which these participants viewed as a risk of worsening consumption prospects,” the minutes said. “They pointed to increased use of credit cards and buy now, pay later services, as well as rising delinquencies on some types of consumer loans.”
Officials were largely optimistic about growth prospects, although they expected some slowdown this year. They also said they expect inflation to eventually return to its 2% target, but are unsure how long it will take or what impact high rates will have on the process.
Immigration has been repeatedly cited as helping to stimulate the labor market and maintain consumption levels.
Market lowers expectations for rate cuts
Public statements by central bankers after the meeting took on a cautionary tone.
Fed Governor Waller said Tuesday that while he doesn’t expect the FOMC will have to raise rates, he cautioned that he would need to see “a few months” of good data before voting to cut rates.
Last week, Chairman Jerome Powell expressed sentiment that was less hawkish in tone, although he argued that the Fed “needs to be patient and let contractionary policies do their job” as inflation remains high.
Markets continue to adjust their expectations for cuts this year. Futures prices as of Wednesday afternoon after the minutes were released indicated a 60% chance that the first move would still occur in September, although the forecast for a second move in December had dropped to only slightly better than a 50-50 coin toss chance. .
Earlier this year, markets were anticipating a decline in rental prices of at least six quarter percentage points.