Fed minutes May 2024: Concerns about persistent inflation

Federal Reserve officials grew increasingly concerned about inflation at their latest meeting, with members saying they did not have enough confidence to move forward with rate cuts.

Minutes of the policy meeting of April 30 – May 1 from the Federal Open Market Committee, released Wednesday, indicated policymakers’ concerns about when it might be time to ease.

The meeting followed a slew of readings that showed inflation was more persistent than officials expected entering 2024. The Fed is targeting inflation of 2%, and all indicators showed price increases well above that level.

“Participants noted that while inflation had declined over the past year, no further progress had been made toward the Committee’s 2 percent target in recent months,” the summary said. “The recent monthly data showed significant increases in the components of both goods and services price inflation.”

The minutes also showed that “several participants mentioned a willingness to tighten policy further if risks to inflation materialized in a way that would make such action appropriate.” Several Fed officials, including Chairman Jerome Powell and Governor Christopher Waller, have said since the meeting that they doubted the next step would be a rate hike.

The FOMC voted unanimously at the meeting to keep its key short-term interest rate at a range of 5.25%-5.5%, the highest level in 23 years where it has been since July 2023.

“Participants felt that maintaining the current target for the federal funds rate at this meeting was supported by data from the mutual meetings that indicate continued solid economic growth,” the minutes said.

Since then, there have been some signs of progress on inflation, as the Consumer Price Index for April showed annualized inflation at 3.4%, slightly below March levels. Excluding food and energy, the core CPI was 3.6%, the lowest since April 2021.

However, consumer surveys show that concerns are increasing. For example, the University of Michigan consumer sentiment survey showed the one-year outlook at 3.5%, the highest level since November, while overall optimism fell. A New York Fed survey showed similar results.

Stock prices remained negative, while government bond yields were largely higher following the release of the minutes.

Fed officials at the meeting pointed to several upside risks to inflation, especially from geopolitical events, and pointed to the pressure inflation was putting on consumers, especially those at the bottom of the wage scale. Some participants said the rise in inflation at the start of the year could be due to seasonal disruptions, although others argued that the “broad-based” of the moves means they should not be “overly discounted.”

Committee members also expressed concern that consumers were 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 coming under increasing pressure, which these participants saw as a downside risk to the outlook for consumption,” the minutes said. “They pointed to increased use of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”

Officials were largely optimistic about growth prospects, although they expected some moderation this year. They also said they expect inflation to eventually return to the 2% target, but were left unsure about how long that would take and how much impact high interest rates will have on the process.

Immigration was repeatedly mentioned as a factor that both stimulates the labor market and maintains consumption levels.

Public comments from central bankers since the meeting have taken on a cautionary tone.

Fed Governor Waller said Tuesday that while he doesn’t expect the FOMC to have to raise rates, he warned he will need to see “several months” of good data before voting for a cut.

Last week, Chairman Jerome Powell expressed sentiments that were not as hawkish in tone, though he insisted the Fed “will have to be patient and let restrictive policy do its work” as inflation continues higher.

Markets have continued to adjust their expectations for cuts this year. Futures prices as of Wednesday afternoon after the minutes were released indicated a roughly 60% chance that the first cut would still occur in September, although prospects for a second move in December fell to only slightly better than a 50-50 chance of tossing coins. .

Earlier this year, markets had priced in a cut of at least six quarters of a percentage point.