Federal Reserve officials at their March meeting expressed concern that inflation was not coming down quickly enough, although they still expect to cut interest rates at some point this year.
At a meeting in which the Federal Open Market Committee voted again to keep short-term borrowing rates stable, policymakers also expressed doubt that inflation, while slowing, was not doing so convincingly enough. The Fed currently sets its key rate between 5.25% and 5.5%.
Therefore, FOMC members voted to keep in the post-meeting statement the phrase that they would not cut rates until they “gained greater confidence” that inflation was on a stable path towards the annual target of 2% of the central bank.
“Participants generally highlighted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was falling sustainably to 2%,” the report said. verbal.
In what was apparently a lengthy discussion about inflation at the meeting, officials cited geopolitical turmoil and rising energy prices as risks of pushing inflation higher. They also cited the potential that looser policy could increase pricing pressures.
On the downside, they cited a more balanced job market, advanced technology along with economic weakness in China and a deteriorating commercial real estate market.
They also discussed higher-than-expected inflation data in January and February. Chairman Jerome Powell said it was possible that the two months’ readings were caused by seasonal issues, although he added that it was difficult to say at this point. There were members at the meeting who disagreed.
“Some participants noted that recent increases in inflation have been relatively broad-based and therefore should not be discounted as mere statistical aberrations,” the minutes read.
This part of the discussion was somewhat relevant considering that the statement came on the same day the Fed received more bad news about inflation.
CPI confirms their concern
The consumer price index, a popular gauge of inflation though not the one the Fed focuses on most, showed a 12-month rate of 3.5% in March. This was higher than market expectations and represented an increase of 0.3 percentage points compared to February, giving rise to the idea that the positive data at the beginning of the year may not have been an aberration.
Following the release of the CPI, participants in the federal funds futures market recalibrated their expectations. Market prices now imply the first rate cut in September, with a total of just two this year. Prior to publication, the odds were in favor of a first reduction expected in June, with three total, in line with the “dot plot” projections released after the March meeting.
Discussion during the meeting indicated that “nearly all participants felt it would be appropriate to shift policy to a less restrictive stance at some point this year if the economy developed broadly as expected,” the minutes read. . “In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be rather erratic.”
Elsewhere in the meeting, officials discussed the possibility of ending budget reductions. The Fed has cut about $1.5 trillion from its holdings of Treasuries and mortgage-backed securities, allowing up to $95 billion in proceeds from maturing bonds to be canceled each month instead of reinvested.
No decisions or indications have been made about how the easing of what has become known as “quantitative tightening” will take place, although the minutes say that unwinding will be reduced by “about half” the current pace and that the process should start “quite early.” Most market economists expect the process to begin in the next month or two.
The minutes note that members believe a “cautious” approach should be taken.