Federal Reserve officials said at their last policy meeting that rates would likely stay higher for longer if inflation readings continued to disappoint, while some policymakers discussed their willingness to raise rates if needed.
“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” according to the minutes of the last meeting, which took place April 30 and May 1.
Stocks slipped from record highs after the minutes were released.
“Higher for longer is the official mantra as the Fed officially acknowledged that inflation is staying more sticky than they would have liked,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
“Although they wanted to cut rates, they are not going to be able to do that in the near future.”
The Fed decided on May 1 to keep its benchmark interest rate in a range of 5.25%-5.50%, a 23-year high, as it tries to get inflation down to its goal of 2%.
The inflation readings in the first quarter were hotter than expected, but an April reading released after the Fed’s last meeting did show some easing of those price pressures.
The Consumer Price Index on a “core” basis, which strips out food and energy prices, rose 3.6% year over year, a cooling from the 3.8% increase seen in March.
Fed officials at their last meeting cited the disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum as reasons why they believe they’ll have to hold rates higher for longer.
A few thought that “unusually large seasonal patterns” could have contributed to January’s large increase in inflation, while several noted that some components that typically display volatile price changes had boosted recent readings.
But some emphasized that the recent increases in inflation had been relatively broad based and shouldn’t be discounted.
There was also a discussion about the restrictiveness of the current level of interest rates.
Many acknowledged uncertainty about how restrictive rates actually are, noting that high rates may be having less of an impact than in past cycles or that longer-run rates that neither boost or slow economic growth may be higher than thought.
“A number of participants noted uncertainty regarding the degree of restrictiveness of current financial conditions and the associated risk that such conditions were insufficiently restrictive on aggregate demand and inflation,” the minutes said.
The minutes, which are released with a three-week lag, come after a slew of Fed officials have publicly called for holding rates at current levels for longer due to the sticky inflation data in the first quarter.
Cleveland Fed President Loretta Mester and Boston Fed President Susan Collins both said Tuesday night they need to see more evidence inflation is cooling before lowering rates.
Collins said the Fed will need to be patient and that getting inflation down will take longer than she previously thought. Mester said she wants to see “a few more months” of data that show inflation is coming down before cutting rates.
Separately Tuesday, Fed Governor Chris Waller said he favors holding interest rates steady for longer and needs to see several more months of good inflation data before lowering rates.
These comments come after Fed Chair Jay Powell said last week he thinks the Fed will need more than a quarter’s worth of data to really make a judgment on whether inflation is steadily falling toward 2%. Waller appears to want more, noting he would like to see “several” months of data.
That implies it will take more than three inflation reports for the Fed to feel confident about lowering rates from a 23-year high, putting the odds on a first rate cut in September at the earliest if the data supports such a move.
Investors are pricing in roughly 50% odds for a September rate cut, with dwindling odds for a second rate cut after that.
Goldman Sachs CEO David Solomon said at an event Wednesday that he doesn’t expect the Fed to raise rates at all this year.
Click here for in-depth analysis of the latest stock market news and events moving stock prices.
Read the latest financial and business news from Yahoo Finance
Credit: Source link
