Federal Reserve officials expressed concern at their March meeting that inflation was not falling fast enough, but still expected to cut interest rates at some point this year.
At a meeting where the Federal Open Market Committee voted again to keep short-term lending rates stable, policymakers also expressed concerns that while inflation was easing, that was not convincing enough. The Fed is currently targeting a key interest rate between 5.25% and 5.5%.
Therefore, FOMC members voted to retain language in the post-meeting statement that they would not cut interest rates until they had gained “greater confidence” that inflation was on a steady path back to the central bank’s annual target of 2%.
“Participants generally expressed uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation would fall sustainably to 2 percent,” the minutes said.
In what appeared to be a lengthy discussion of inflation at the meeting, officials said geopolitical unrest and rising energy prices remained risks that could push inflation higher. They also pointed to the potential for looser policies to increase price pressures.
On the other hand, they cited a more balanced labor market, improving technology, as well as economic weakness in China and a deteriorating commercial real estate market.
U.S. Federal Reserve Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee meeting on interest rate policy in Washington, U.S., March 20, 2024.
Elizabeth Frantz | Reuters
They also discussed higher-than-expected inflation readings in January and February. Chairman Jerome Powell said it was possible that the two-month reading was due to seasonal issues, but added that it was difficult to say at this point. There were members of the congregation who disagreed.
“Some participants noted that recent increases in inflation have been relatively broad-based and therefore should not be dismissed as mere statistical aberrations,” the minutes said.
This part of the discussion was partially relevant because the release came on the same day that the Fed received more bad news on inflation.
CPI acknowledges their concerns
The consumer price index, a popular indicator of inflation but not the Fed’s focus, had a 12-month rate of 3.5% in March. That was both above market expectations and an increase of 0.3 percentage points from February, leading to suggestions that the hot readings earlier in the year may not have been an aberration.
Following the release of the consumer price index, traders in the Fed funds futures market have recalibrated their expectations. Market prices now assume that the first rate cut will occur in September, making only two cuts this year. Before the release, the odds for the first cuts in June, three in total, were in line with the “dot plot” forecasts released after the March meeting.
Discussion at the meeting indicated that “almost all participants agreed that it would be appropriate to shift policy to a less restrictive course at some point this year if the economy broadly develops as expected,” it said it in the minutes. “In support of this view, they noted that the disinflation process was continuing along a path that was widely expected to be somewhat uneven.”
During the meeting, officials also discussed the possibility of ending balance sheet reduction. The Fed has trimmed about $1.5 trillion from its holdings of Treasury and mortgage-backed securities by draining up to $95 billion of maturing bond proceeds each month rather than reinvesting them.
No decisions have been made or indications given as to how the easing of what has become known as “quantitative tightening” will take place. However, the minutes say the slowdown would be “approximately halved” from the current pace and the process should begin. “Pretty soon.” Most market economists expect the process to begin in the next month or two.
The minutes noted that members believed a “cautious” approach should be taken.
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2024-04-10 19:08:47
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