FX168 Financial News (North America) News On Wednesday (May 22), the minutes of the Federal Reserve's May meeting raised concerns about continued inflation, indicating that the central bank may not cut interest rates anytime soon. US stocks declined, and the dollar rose.
The minutes of the Federal Open Market Committee's April 30 to May 1 policy meeting show that there has been no progress in reducing inflation in recent months. The minutes of the meeting also showed that “many participants” discussed their intention to raise interest rates if inflation does not continue to move towards the 2% target.
A series of data prior to this meeting showed that starting in 2024, inflation was more stubborn than officials expected. The Federal Reserve's target is a 2% inflation rate, and all indicators show that the price increase far exceeds this target.
The minutes stated: “Participants pointed out that despite some easing in inflation over the past year, there has been a lack of further progress in achieving the Commission's 2% target in recent months.” “Recent monthly data shows a significant increase in both components of price inflation for goods and services.”
The minutes of the meeting also showed, “Many participants mentioned that if the risk of inflation becomes a reality, they are willing to further tighten policies, and this kind of action is appropriate.”
The Federal Open Market Committee voted unanimously at the meeting to maintain the benchmark short-term loan interest rate in the 5.25%-5.5% range, which is a 23-year high since July 2023.
According to the minutes of the meeting, “Participants assessed that the current target range for maintaining the federal funds rate at this conference is supported by data from the conference showing continued steady economic growth.”
Since then, inflation has shown some signs of gradual progress. The consumer price index for April showed that the inflation rate was 3.4% per annum, slightly lower than the March level. Excluding food and energy, the core CPI was 3.6%, the lowest level since April 2021.
However, consumer surveys show growing concerns. For example, according to the University of Michigan Consumer Confidence Survey, the one-year consumer confidence index was 3.5%, the highest level since November, yet overall optimism declined. A New York Federal Reserve survey showed similar results.
Market reaction
The US dollar index rose nearly 10 points in the short term to 104.83.
(US dollar index 15-minute trend chart source: FX168)
The Dow Jones Industrial Average fell 0.50%. The S&P 500 Index and the Nasdaq Composite Index fell 0.3% and 0.4%, respectively.
(Dow 30-minute trend chart source: FX168)
Risks of rising inflation?
At the meeting, Federal Reserve officials pointed out some of the upward risks of inflation, especially those caused by the geopolitical crisis, and pointed out the pressure that inflation puts on consumers, especially those with lower wage levels. Some participants said that the rise in inflation at the beginning of the year was likely due to seasonal distortions, but others believed that the “broad-based” nature of these measures meant they should not be “unduly underestimated.”
Committee members are also concerned that as inflationary pressure continues, consumers will resort to riskier forms of financing to maintain balance of payments.
“Many participants indicated that there are signs that the financial situation of low- and middle-income households is under increasing pressure, and they see this as a downside risk to consumption prospects,” the minutes said. “They pointed to increased usage of credit cards and buy-and-pay later services, as well as a rise in delinquency rates for certain types of consumer loans.”
Officials are generally optimistic about economic growth prospects, although they expect inflation to ease somewhat this year. They also said that the inflation rate is expected to eventually return to the 2% target, but it is uncertain how long this will take and how much impact high interest rates will have on this process.
The issue of immigration has been mentioned many times as a factor in stimulating the labour market and maintaining consumption levels.
The market lowered expectations of interest rate cuts
Since the meeting, central bank governors have shown a cautious tone in their public statements.
Federal Reserve Governor Christopher Waller said on Tuesday that although he doesn't expect the Federal Open Market Committee to raise interest rates, he warned that he would need to see “several months” of good data before voting to cut interest rates. Chairman Jerome Powell wasn't that strong last week, but he insisted that as inflation rises, the Federal Reserve will “need to be patient and let restrictive policies work.”
The market continues to adjust expectations for interest rate cuts this year. Futures pricing as of Wednesday afternoon shows that the probability of cutting interest rates for the first time in September is about 60%, although the outlook for a second rate cut in December is 50%.