Federal Reserve Concerned About Inflation Uptick: Minutes

Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting at the Federal Reserve in Washington on Nov. 1, 2023. (Kevin Dietsch/Getty Images)

Federal Reserve officials agreed it would take longer than previously thought to achieve greater confidence that inflation is moving toward the central bank’s 2 percent target, according to new minutes from the April 1 to May 1 policymaking meeting.

The two-day meeting summary, released on May 22, featured policymakers discussing the causes of the first-quarter inflation increase, with opinions ranging from seasonal distortions to potential broad-based upticks that should not be “overly discounted.”

The minutes highlighted consternation as to when it would be appropriate to ease monetary policy, with meeting participants assessing that the future path of the institution’s restrictive stance was uncertain.

“Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the minutes stated. “The recent monthly data had showed significant increases in components of both goods and services price inflation.”

Some market participants suggested that it might be appropriate to raise interest rates.

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes read.

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Officials alluded to how much pressure inflation was having on U.S. consumers, especially low-income individuals.

“Many participants noted signs that the finances of low- and moderate-income households were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption,” the summary states. “They pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”

Staff economists warned that household financial positions are deteriorating, particularly for low-income households, and that this could “prove to be a larger drag on activity than the staff anticipated.”

Earlier this month, the Fed left interest rates between 5.25 percent and 5.5 percent, the highest in 23 years.

The next two-day policy meeting will take place on June 11 and 12.

Market Reaction

The U.S. financial markets turned negative after the minutes signaled that the Fed was concerned about the lack of progress in its quest to fight inflation.

The leading benchmark indexes slumped by as much as 0.5 percent.

U.S. Treasury yields were up across the board, with the benchmark 10-year yield firming above 4.43 percent. The 2-year yield surged above 4.88 percent, while the 30-year bond topped 4.55 percent.

The U.S. dollar index, a gauge of the greenback against a basket of currencies, rose to 104.80, lifting its year-to-date gain to nearly 3.5 percent.

What Fed Officials Are Saying

Despite hotter inflation readings to kick off 2024 that spooked the central bank, Fed officials welcomed the slight 0.1 percent dip in the April consumer price index (CPI).

“It is too early to tell whether the recent slowdown in the disinflationary process will be long-lasting. The better reading for April is encouraging,” Fed Vice Chair Philip Jefferson said at a Mortgage Bankers Association conference on May 20.

Heading into the release of the meeting summary, Fed officials asserted that inflation will likely continue to ease but at a slower pace. However, they reiterated the position that they would wait for more good inflation data before supporting a cut to interest rates.

As for when that could be, opinions have varied.

Federal Reserve Bank of Atlanta President Raphael Bostic speaks to reporters at the National Association of Business Economics' annual policy meeting in Washington on March 21, 2022. (Ann Saphir/Reuters)

Atlanta Fed President Raphael Bostic told the Financial Markets Conference in Amelia Island, Florida, on May 21 that he does not expect a rate cut before the fourth quarter.

“I’m not in a hurry to cut rates,” Mr. Bostic said at the regional central bank’s event. “We need to make sure that when we start on that path, it’s unambiguous that inflation is going to get to 2 percent. The existence of this potential exuberance means that we have to be very cautious about when we do that first move, and it may mean that it has to happen later.”

Fed board member Christopher Waller said at the Peterson Institute for International Economics that he will keep that to himself for now.

According to the March Summary of Economic Projections data, Fed officials were still anticipating three rate cuts this year, with the median policy rate falling to 4.6 percent.

The futures market is pricing in two quarter-point rate reductions this year beginning in September.

The next key inflation reading will be the Fed’s preferred personal consumption expenditures (PCE) price index. It came in slightly higher than expected in March, rising from 2.5 percent to 2.7 percent.

Despite the CPI suggesting broad-based price pressures, former Fed Chair Ben Bernanke said that the United States will need to experience weakness in the labor market in order to successfully fight inflation and restore the 2 percent target rate.

“Some countries, including the United States, may need some loosening of labor market conditions to achieve their inflation targets,” Mr. Bernanke co-wrote in a Brookings Institution paper.

Last month, the unemployment rate ticked up to 3.9 percent from 3.8 percent.

According to the Cleveland Fed Inflation Nowcasting model, the April PCE reading could be unchanged.