Fed minutes show disappointment over inflation readings

Even as they acknowledged disappointment over recent inflation readings, Federal Reserve officials at their last policy meeting indicated they still had faith that price pressures would ease, if only slowly, according to the minutes of the US central bank’s April 30-May 1 session.

“Participants ... noted that they continued to expect that inflation would return to 2% over the medium term,” the minutes said, but “the disinflation would likely take longer than previously thought”.

While the policy response for now would “involve maintaining” the central bank’s benchmark policy rate at its current 5.25%-5.50% level, the minutes, released on Wednesday, also reflected discussion of possible further hikes in borrowing costs.

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate,” employing a modifier that does not fit in the usual set of words, like some, many and most, used in the minutes to give a sense of how many officials voiced a particular opinion.

The minutes also reflected debate about just how restrictive current monetary policy is given the strength of the economy, an important discussion given the need for policy to be “sufficiently” restrictive to cool inflation.

US Treasury yields edged up after the release of the minutes and traders pulled back slightly from bets on Fed rate cuts this year, with rate futures contracts reflecting only about even odds the central bank will reduce rates more than once this year.

“Higher for longer is the official mantra,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, adding that though Fed officials “wanted to cut rates, they are not going to be able to do that in the near future”.

Officials since that meeting have tamped down expectations for imminent rate cuts, which some investors now see beginning in September.

But even as Fed officials acknowledged the risk of inflation pressures again building in the economy, they largely viewed the data from the start of the year as a temporary setback in the battle to return inflation to the central bank’s 2% target.

The meeting was the sixth straight to feature no change in interest rates. Policymakers at this point seem likely to keep the Fed’s benchmark rate on hold until September at least, after their confidence in easing price pressures was shaken by higher-than-expected inflation through the first three months of this year.

Emerging signs

Fed chair Jerome Powell, at his post-meeting press conference on May 1, said it “will take longer than previously expected” for policymakers to become comfortable that inflation will resume the decline towards 2% that had cheered them through much of last year.

In the weeks since then, however, some signs have emerged that inflation is again easing, demand is softening and the labour market is coming more into balance. Fed officials are watching closely for signs of a possible slowdown in consumption, and warnings from consumer-facing companies point in that direction.

Firms ranging from McDonald’s to PepsiCo have flagged in recent weeks the strain that US consumers are under due to sticky food inflation and the rising costs of eating out, renting homes and getting a mortgage.

“We remain cautious in our near-term growth outlook and we expect consumer discretionary trends to remain pressured in the short term,” Christina Hennington, chief growth officer for Target, said on Wednesday in a media call to discuss the retailer’s quarterly results.

Still, Fed officials have said that gaining “greater confidence that inflation is moving sustainably towards 2%” — a standard for pivoting to rate cuts that they have embedded in their policy statements since January — will take more time.

On Tuesday, Fed governor Christopher Waller put the time frame at “several months”.

“In the absence of a significant weakening in the labour market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy,” he told the Peterson Institute for International Economics in Washington.

Reuters