The Federal Reserve's latest meeting minutes, released in the early hours of May 23, Beijing time, paint a rather concerning picture regarding the state of inflation in the United StatesThe minutes from the April 30 to May 1 policy meeting illustrate that the central bank has not been able to achieve substantial progress in combating inflation in recent months, leading to heightened concerns about price stabilityThis lack of progress has sparked worries that interest rates may not be lowered anytime soon and has reignited fears of potential interest rate hikes.
During the meeting, participants expressed that despite some easing of inflation observed over the past year, there has not been enough recent progress towards the Fed's 2% inflation targetRecent data reveals a significant increase in the components that make up the inflation rate for goods and servicesThe emergence of these reports indicates that inflation may prove more persistent than the Fed initially anticipated, and the timeline to gain confidence in inflation control has stretched longer than previously expected
The restricted nature of the current monetary policy also faces considerable uncertainty, as officials highlighted the risks posed by overly accommodative financial conditions.
Consequently, the language used in the minutes signals that the Fed is taking a vigilant stance towards inflationWhile a series of inflation reports at the beginning of the year exceeded expectations, leading to speculation about potential rate cuts, the numbers in April, although showing some improvement, were not enough to dispel prior inflationary pressuresSeveral attendees at the meeting remarked on their willingness to tighten monetary policy further should inflation risks materialize, emphasizing that such actions would be deemed appropriate if the economic indicators pointed in that direction.
In an unexpected twist, the attention to the meeting resulted in an immediate negative reaction in the stock market, with the Dow Jones Industrial Average dropping more than 300 points at one point during the trading day
- Europe: Recovery and Investment Prospects
- Fund Issuance Revives, Bond Funds Take Center Stage
- Plunging Again! Oil Prices Hit New Lows
- UK Property Profits Hit Decade Low
- Sense of Recession Grips US Despite Data
By the close of the market on that day, the S&P 500 had fallen by 0.3%, and the NASDAQ Composite decreased by 0.2%. These market moves appear to reflect the growing apprehension among investors regarding the Fed's path forward in its monetary policy, particularly concerning inflation control and interest rate movements.
The April 30 meeting had seen the Fed decide to maintain its current policy stance and slow the pace of quantitative tightening (QT) in JuneThe limits for monthly reductions in Treasury holdings were adjusted to $25 billion, while those for mortgage-backed securities (MBS) remained unchanged at $35 billion per monthThis moderation reflects a cautious approach, indicating that while the Fed acknowledges recent changes in economic conditions, it is not yet ready to implement aggressive rate cuts.
Jerome Powell, the Chair of the Federal Reserve, addressed the media following the meeting, suggesting that achieving certainty regarding interest rate cuts would take longer than previously thought
He noted the uncertainty surrounding when the Fed would feel confident enough to reduce ratesHe indicated that the next move by the Federal Open Market Committee (FOMC) was unlikely to be an increase in rates, pointing out that short-term inflation expectations had risen and labor demand remained solid despite cooling from the peaks observed during the pandemic.
The anticipation surrounding the Fed's next FOMC meeting set for June 11-12 is palpableInvestors had previously accounted for a potential rate cut in June, but with the unfolding developments, expectations are fluctuatingFresh before the release of the meeting minutes, several Fed officials had spoken cautiously about the prospect of easing monetary policy, reiterating the likelihood of further rate hikes given the prevailing inflationary pressures.
Specifically, Federal Reserve Governor Christopher Waller, on May 21, stated that while he did not foresee the need for additional rate hikes, he required several months of encouraging data before contemplating any cuts
This sentiment was echoed by Powell as he mentioned that the Fed would need to maintain patience to allow restrictive policies to take effect amid rising inflation.
Amid these developments, market participants are closely monitoring how Fed officials will balance the ongoing inflation trajectory with earlier expectations of three rate cuts projected for 2024. Prior to the meeting minutes being released, Macquarie's global foreign exchange and interest rate strategist, Thierry Wizman, noted that the comments from Fed officials sounded less dovish and more cautious than Powell's statements after the May 1 press conferenceWizman anticipates that policymakers will gradually elevate their expectations regarding the suitable long-term neutral interest rate.
Goldman Sachs' CEO, David Solomon, also weighed in, predicting that the Fed would refrain from lowering rates this year due to increased government spending, which has given the U.S