Fed Worries If Current Rates Are Enough to Tame Inflation

Federal Reserve officials made clear they are still worried about the still-elevated levels of inflation according to the minutes from the April 30-May 1 policy meeting of the Federal Open Market Committee that were released this afternoon. The meeting came on the heels of a number of readings that showed inflation has been more persistent than officials had expected at the beginning of the year.

“Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the report said. “The recent monthly data had showed significant increases in components of both goods and services price inflation.”

Not only have officials indicated they want to see several months of declining inflation data before they initiate rate cuts, but the minutes also showed “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” This possibility has been raised before by some Fed officials and market participants but other Fed officials, including Chair Jerome Powell and Governor Christopher Waller, have said they doubt the next move would be a hike.

But officials debated whether the benchmark rate – now at a 23-year high –  was pumping the brakes hard enough on the economy and that the high interest rates “may be having smaller effects than in the past.” For instance, many homeowners are sitting on low interest rate mortgages and most large companies refinanced their debt when rates were low – developments that may have blunted the effect of the high rates.

Fed officials are also concerned about the impact inflation is having on lower-income households and the knock-on effect that could have on the larger economy.

“Many participants noted signs that the finances of low- and moderate-income households were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption,” the minutes said. “They pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”

Citi’s Andrew Hollenhorst raised an interesting point in a client note, noting that the economic data released so far this month makes the minutes “stale” at this point, according to a report in Barron’s.

“Since the May 1st FOMC meeting, a slowdown in job growth and outright declines in retail sales and industrial production will have officials more convinced that growth is slowing down,” Hollenhorst wrote.

The minutes reflected a general sense of optimism among Fed officials about growth prospects though some moderation is expected this year. Ultimately, they anticipate that inflation will return to the 2% objective. How long that would take is the big question.