Federal Reserve officials have indicated they may raise interest rates again if inflation does not decrease further, according to the minutes of their April-May meeting released on Wednesday.
“Several participants expressed a willingness to tighten policy further if inflation risks emerged that justified such action,” the minutes stated.
The Fed published a summary of their April 30-May 1 closed-door meeting three weeks after it took place.
At the meeting, the Fed decided to keep its benchmark interest rate between 5.25% and 5.5%, the range it has been in since last July.
During their discussion, Fed officials were concerned about “disappointing” inflation figures, noting that recent data suggested inflation could persist in the coming months.
Kathy Bostjancic, chief economist at Nationwide, noted that the Fed has become more hesitant about cutting interest rates.
“The minutes clearly showed that following higher-than-expected inflation in the first quarter, Fed officials’ confidence had been shaken,” Bostjancic said.
She mentioned that the Fed might still cut rates this year if inflation does not pick up again and the economy weakens. The earliest this could happen is at the September meeting, according to her forecast.
The minutes revealed that Fed officials were worried about the slower-than-expected decline in housing and labor costs, which are major contributors to current U.S. inflation.
Additionally, a steadily growing U.S. economy could sustain high consumer demand for goods and services, keeping prices elevated, some Fed officials suggested.
As a result, Fed officials believed it would take longer than previously thought to be confident that inflation would move toward their 2% target. They still expected the economy to grow at a slower rate, which would help balance supply and demand.
Since the decision, Fed officials have emphasized the importance of patience and maintaining steady rates to ensure inflation trends back to the 2% goal. This need for patience was highlighted in the minutes, reflecting high inflation readings from January to March.
The minutes also revealed that many officials were concerned that the current benchmark rate might not be sufficient to reduce inflation.
“Although monetary policy was considered restrictive, many participants expressed uncertainty about its degree of restrictiveness,” the minutes noted.
This uncertainty arose from the possibility that high interest rates might have less impact than before, or that the “neutral” interest rate could be higher than previously thought.
Officials also discussed whether the economy’s growth rate was lower than estimated, raising concerns about potential overheating, according to Bostjancic.
In their discussion of future policy moves, officials considered holding rates for longer if inflation remained high or cutting them if the labor market weakened unexpectedly.
This stance was more hawkish than at the previous Fed meeting in March, where officials believed the policy rate was likely at its peak for the current tightening cycle and anticipated moving to a less restrictive stance if the economy evolved as expected.
Since the May meeting, April’s CPI data has been released and was seen as a relief by many Fed officials after strong inflation readings in the first quarter.
Stocks DJIA SPX dropped after the minutes were released, while the yield on the 10-year Treasury note BX:TMUBMUSD10Y remained relatively stable, trading below 5% since Fed Chairman Jerome Powell’s May 1 press conference, which was perceived as dovish.
