Source: Golden Ten Data

The Federal Reserve released the minutes of the two-day Federal Open Market Committee (FOMC) meeting that ended May 1. The minutes showed that although participants felt that the policy was “well-positioned,” many officials mentioned that they are willing to further tighten the policy if necessary. Officials are unanimous in their desire to keep interest rates high, and “many” question whether the policy is restrictive enough to reduce the inflation rate to the target level.

Regarding the interest rate policy, officials think the policy is generally restrictive, but policymakers point out that high interest rates may have less impact on the economy than in the past. They also said that long-term neutral interest rates (a level of interest rates that neither slow down nor stimulate demand) may be higher than previously thought. “Many participants expressed uncertainty about the extent of the restrictions.”

Regarding inflation, the minutes of the meeting showed that participants noted that the inflation data for the first quarter was disappointing. “It will take longer than previously anticipated to have greater confidence that inflation will continue to move towards 2%.” Participants believed that the anti-inflation process might take longer than previously thought.

Officials also discussed issues such as keeping interest rates stable for a longer period of time if the inflation rate shows no signs of continuing to move towards 2%; reducing policy restrictions if labor market conditions unexpectedly weaken. After inflation rebounded in the first quarter, Federal Reserve officials said they would keep interest rates at a 23-year high for longer than initially anticipated.

Regarding QT, officials voted at that meeting to slow down the pace of reducing the asset portfolio and to reduce the US Treasury holdings limit from $60 billion to $25 billion starting in June. The minutes of the meeting showed that almost all participants supported the new cap, but there was also a “minority” of officials who supported continuing the current outflow rate or limiting the reduction of US Treasury bonds to a higher level than already decided. Many participants stressed that the decision to slow the pace of downsizing will not affect monetary policy positions.

Regarding economic prospects, several participants said that increased efficiency and technological innovation could sustain productivity growth, which could enable the economy to grow faster without increasing inflation. Participants also noted downside risks faced by economic activity, including worsening conditions in the US domestic real estate market or sharp tightening of financial conditions.

Regarding financial stability, participants identified weaknesses in the financial system that they felt should be monitored. Overall, they still believe that the financial vulnerability of the system is significant, but they raised the assessment of asset valuation vulnerability to a higher level because a range of markets seem overvalued compared to risk-adjusted cash flow.

Here's a more summary of the meeting minutes:

Housing service inflation has slowed less than expected

The minutes of the meeting mentioned that recent monthly data showed that components of inflation in the prices of goods and services have risen sharply. In particular, compared with the fourth quarter of last year, the price of core services excluding housing increased in the first quarter, and the price of core commodities rose in three months for the first time in a few months. Furthermore, despite a small increase in the market rent index over the past year, housing service inflation has slowed less than expected based on this indicator. Some participants pointed out that unusual seasonal factors may have contributed to the sharp rise in PCE inflation in January, while others pointed out that some components that usually indicate price fluctuations have boosted recent data. However, some participants emphasized that the recent rise in inflation was relatively widespread and should therefore not be undervalued.

The labor market continues to be better balanced, but at a slower pace

Participants assessed that overall, demand and supply in the labour market continued to be better balanced, albeit at a slower pace. However, they believe that in the context of recent strong employment growth and still low unemployment, the overall economic situation is still tight. Participants cited a range of indicators showing an easing of labour market tension, including fewer job vacancies, lower resignation rates, and a decrease in the ratio of job vacancies to unemployed workers. Business contacts reported fewer difficulties in hiring or retaining workers, although contacts in several regions continued to report tight labour conditions, particularly in the health and construction sectors. Many participants believed that improving the balance between labor supply and demand would help ease pressure on nominal wages.

The rise in commodity prices due to geographical factors is one of the upward risks of inflation

Some participants pointed out that geopolitical events or other factors have led to increased supply bottlenecks or higher transportation costs, which could put upward pressure on prices and drag down economic growth. The possibility that geopolitical events may cause commodity prices to rise is also seen as an upward risk to inflation.

Wall Street Interpretation

After the release of the minutes, the yield on US 10-year treasury bonds rose in the short term, the US dollar index rose to the 105 mark, the three major US stock indexes fell further, and the decline in gold and silver accelerated. Spot gold fell below the five major levels one after another, falling back below $2,380 per ounce, while spot silver fell more than 3% and fell below the $31 mark. Traders cut their bets that the Federal Reserve will cut interest rates more than once this year.

Analysts believe that the minutes of the May meeting of the Federal Reserve seem very strong, and the interest rate hike does not seem as far out of reach as Powell said, showing concerns about the relaxed environment and policy uncertainty. Participants are willing to further tighten monetary policy if necessary; many officials are unsure how restrictive the policy is. “If necessary” is an important qualifier. Despite this, uncertainty about the extent to which the policy actually limits the economy means that it is also uncertain whether further policy tightening is actually not within the scope of consideration.

“Federal Reserve microphone” Nick Timiraos wrote that at a recent meeting, Federal Reserve officials concluded that they need to keep interest rates at current levels longer than previously anticipated. According to the latest meeting minutes, although officials still believe that interest rates are high enough to curb economic activity and reduce inflation, they suggest that they are less sure about the extent to which policies are restrictive. An unknown number of officials mentioned that they are willing to tighten the policy further if the risk of inflation makes it reasonable to tighten the policy. Price pressure slowed markedly in the second half of last year. Federal Reserve officials hinted in March that if there were another month or two of moderate inflation, they might be ready to start cutting interest rates. However, a series of data for the first quarter shows that price pressure in the economy is heating up, and unless the job market weakens unexpectedly, the Federal Reserve has been forced to put aside any consideration of starting to cut interest rates in the next few months.

Editor/jayden