At their March meeting, Federal Reserve officials expressed concern that inflation was not falling fast enough, even though they still expected to cut interest rates at some point this year.
At a meeting in which the Federal Open Market Committee again voted to maintain short-term borrowing rates, policymakers also expressed concerns that inflation, although slowing , does not do it convincingly enough. The Fed is currently targeting its benchmark rate between 5.25% and 5.5%.
That’s why FOMC members voted to maintain in the post-meeting statement that they would not cut rates until they “gain greater confidence” that inflation would steadily return towards the central bank’s annual target of 2%.
“Participants generally expressed uncertainty that high inflation would persist and expressed the view that recent data had not increased their confidence that inflation would fall sustainably to 2 percent,” indicates the minutes.
During what appeared to be a lengthy discussion about inflation at the meeting, officials cited geopolitical unrest and rising energy prices as risks of pushing up inflation. They also raised the possibility that looser policy could worsen price pressures.
Instead, they cite a more balanced labor market, improved technology as well as China’s economic weakness and a deterioration in the commercial real estate market.
They also discussed higher-than-expected inflation figures in January and February. Chairman Jerome Powell said it was possible the two-month figures were caused by seasonal issues, although he added it was hard to say at this point. Some members at the meeting disagreed.
“Some participants noted that recent increases in inflation had been relatively widespread and therefore should not be viewed as simple statistical aberrations,” the minutes said.
This part of the discussion was partly relevant given that the release came on the same day the Fed received more bad news on inflation.
CPI validates its concern
The Consumer Price Index, a popular inflation gauge but not the one the Fed focuses on most, showed a 12-month rate of 3.5% in March. This is both above market expectations and represents an increase of 0.3 percentage points from February, suggesting that the hot numbers from earlier in the year may not have been a aberration.
Following the release of the CPI, traders in the federal funds futures market recalibrated their expectations. Market prices now imply that the first rate cut will come in September, for a total of only two this year. Prior to publication, the odds favored a first cut in June, with three cuts in total, in line with dot plot projections released after the March meeting.
Discussion at the meeting indicated that “nearly all participants felt it would be appropriate to adopt a less restrictive policy at some point this year if the economy performed overall as they hoped,” the lawsuit says -verbal. “In support of this view, they noted that the process of disinflation continued on a trajectory that was generally considered somewhat uneven.”
At the meeting, officials also discussed the possibility of ending balance sheet reduction. The Fed reduced its holdings of Treasurys and mortgage-backed securities by about $1.5 trillion by allowing up to $95 billion of proceeds from maturing bonds to roll over each month rather than reinvest.
No decision has been made or indication of how the easing of what is now called “quantitative tightening” will occur, although the minutes indicate that mitigation would be reduced “by approximately half” compared to its current pace and that the process should begin. Fairly early.” Most market economists expect the process to begin within a month or two.
The minutes indicate that members felt a “cautious” approach should be taken.
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