On May 1, 2024, U.S. Federal Reserve Chairman Powell held a press conference after holding a two-day interest rate policy meeting in Washington, USA.
Kevin Lamarque | Reuters
Fed officials grew more concerned at their latest meeting on inflation, with members saying they lacked the confidence to move forward with rate cuts.
Minutes of the Federal Open Market Committee’s April 30-May 1 policy meeting released on Wednesday showed policymakers were concerned about when to implement easing policy.
The meeting follows a flurry of data showing inflation is more stubborn than officials expected starting in 2024.
“Participants noted that while inflation has eased over the past year, there has been a lack of further progress in recent months towards the Committee’s 2 percent objective,” the summary states. “Recent monthly data show that inflation in goods and services prices has components have increased significantly.”
Minutes of the meeting also showed that “several participants mentioned that they would be willing to further tighten policy if inflation risks materialized, and that such action would be appropriate.”
The FOMC voted unanimously at the meeting to keep the benchmark short-term borrowing rate in a range of 5.25%-5.5%, a 23-year high since July 2023.
The minutes of the meeting stated, “Participants assessed that maintaining the current target range for the federal funds rate at this meeting was supported by data during the meeting showing continued solid economic growth.”
Inflation has since shown some signs of gradual progress, with April’s consumer price index showing inflation at an annual rate of 3.4%, slightly below March levels. Excluding food and energy, core CPI was 3.6%, the lowest level since April 2021.
However, consumer surveys show growing concern. For example, the University of Michigan Consumer Confidence Survey showed that the one-year consumer confidence index was 3.5%, the highest level since November, while overall optimism has declined. A survey by the New York Fed showed similar results.
Upward inflation risk?
Fed officials pointed to some upside risks to inflation at the meeting, particularly those posed by geopolitical events, and noted the pressure inflation would put on consumers, especially those with lower wages. Some participants said the rise in inflation at the start of the year may have come from seasonal distortions, but others argued that the “broad-based” nature of the measures meant they should not be “overly underestimated”.
Committee members are also concerned that as inflationary pressures persist, consumers will resort to riskier forms of financing to make ends meet.
Minutes of the meeting: “Many participants pointed to signs that the financial well-being of low- and middle-income households is coming under increasing pressure, which they saw as a downside risk to the outlook for consumption.” “They pointed to the rise of credit cards and buy-now-pay-later services. Utilization increased, as did delinquency rates for certain types of consumer loans.”
Officials are largely optimistic about growth prospects, although they expect growth to slow this year. They also said inflation was expected to eventually return to the 2% target, but they were unsure how long that would take and how much impact higher interest rates would have on that process.
Immigration has been mentioned many times as a factor that helps stimulate the labor market and maintain consumption levels.
Market lowers interest rate cut expectations
Since the meeting, public comments from central bankers have struck a cautious tone.
Federal Reserve Governor Christopher Waller said on Tuesday that while he did not expect the Federal Open Market Committee to have to raise interest rates, he warned that he would need to see “several months” of good data before voting to cut rates. Last week, Chairman Powell struck a less hawkish tone, though he insisted that the Fed “needs to be patient and let restrictive policies take effect” as inflation rises.
The market continues to adjust expectations for interest rate cuts this year. Futures pricing as of Wednesday afternoon showed about a 60% chance of a first rate cut in September, although the prospect of a second rate cut in December was only slightly better than a 50-50 coin toss. Earlier this year, markets had priced in a rate cut of at least six percentage points.
