Fed minutes "hawkish": officials hinted at considering raising interest rates if necessary

CBN

2024-05-23 07:47Posted on the official account of Shanghai Yicai

In the early morning of Thursday Beijing time, the Federal Reserve released the minutes of the April Federal Open Market Committee (FOMC) policy meeting.

The minutes showed that the Fed was disappointed with the recent inflation data and was willing to consider raising interest rates again if it cooled down further. Affected by this, the three major U.S. stock indexes dived in the short term, medium and long-term U.S. Treasury yields stabilized and rebounded, and the U.S. dollar index approached the 105 mark again.

The Federal Reserve expressed concerns about inflation

The latest minutes showed that participants expected inflation to return to 2% in the medium term, but the disinflationary process could take longer than previously thought. "Participants observed that while inflation has eased over the past year, there has been a lack of further progress in recent months towards the Commission's 2% target. The components of both goods and services price inflation have increased significantly. ”

Monetary policy remains seen as restrictive, but many participants commented on the uncertainty of its degree of restriction. "This uncertainty stems from the fact that higher interest rates may have less impact than in the past, or that the so-called neutral rate may be higher than previously thought." The minutes said.

It should be noted that there is discussion within the committee about the possibility of further rate hikes. "Several participants mentioned that they are willing to tighten policy further if inflation risks arise in an appropriate way."

The Fed has raised several upside risks to inflation, particularly geopolitical events, which will weigh on consumers. Some participants said the rise in inflation at the start of the year could be due to seasonal distortions, but others argued that the risks should not be overestimated. "Many participants noted that there were signs that the finances of low- and middle-income households were increasingly under pressure, which was a downside risk to the consumption outlook. They noted an increase in the use of credit cards and buy now, pay later services, and an increase in delinquency rates for certain types of consumer loans. ”

As for the policy outlook going forward, participants argued that if inflation remains sticky, interest rates will remain high for longer, or cut in the event of unexpected weakness in the labor market. This is a tougher stance than at the March Fed meeting, when officials judged that policy rates could be at the peak of this tightening cycle, and almost all participants agreed that a shift to a less restrictive stance sometime this year would be appropriate if the economy developed as broadly as they expected.

Regarding the adjustment of the pace of balance sheet reduction, the minutes said that almost all participants expressed support for the Fed's decision to start slowing down the pace of tapering of securities holdings in June. Some participants hinted that they could have supported a continuation of the current pace of balance sheet reduction, or a slight increase in the redemption ceiling for US Treasuries. A number of participants stressed that the decision to slow the pace of balance sheet reduction will not have an impact on the monetary policy stance. Several participants also stressed that a slower pace of balance sheet reduction did not mean that the balance sheet would eventually be reduced by less than other modes of balance sheet reduction. There was general agreement that continued monitoring of the stockpile status indicator would be important in the future.

The timing of the rate cut still needs to wait

Before the interest rate meeting, the U.S. inflation indicator was higher than expected for three consecutive months due to energy prices and rents, which also brought great challenges to the monetary policy shift. However, after the Fed's decision, the market once again saw signs of price easing, while weak demand could weigh on the economy, the labor market was more balanced, and investors began to rekindle hopes for a rate cut in September.

In recent weeks, a number of companies, including McDonald's and PepsiCo, have pointed out that U.S. consumers are under pressure due to sticky inflation and rising costs for eating out, renting and mortgages.

"We remain cautious about the near-term growth outlook and expect consumer discretionary trends to remain under pressure in the near term," Christina Hennington, vice president and chief growth officer at retailer Target, said on an earnings call on Wednesday. ”。

Bob Schwartz, a senior economist at Oxford Economics, previously said in an interview with CBN reporters that the door for the Fed to cut interest rates later this year is not closed. Of course, this depends on whether the inflation data goes hand in hand. Housing inflation remains a significant challenge and may take longer to subside, but there are signs that it is coming.

Judging from the statements made so far this month, even though the progress in prices has been confirmed, no official has yet spoken about the topic of interest rate cuts. Yicai found that although Fed Governor Bowman and Minneapolis Fed President Kashkari talked about the possibility of raising interest rates, most Fed officials tend to be patient and continue to pay attention to the performance of economic data. Fed Governor Christopher Waller told the Peterson Institute for International Economics in Washington this week: "In the absence of significant weakness in the labor market, I need to see a few months of good inflation data to feel comfortable supporting an easing of monetary policy stance." ”

Fed funds rate futures show that the probability of a rate cut in September is back below 60% again. Boris Schlossberg, macro strategist at BK asset management, told CBN that the situation has changed slightly compared to the minutes of the meeting, but it is not enough for the Fed to gain the confidence to act. He believes that the conditions for a monetary policy pivot will gradually ripen as tightening policy further pressures on the economy. For the Fed, cutting interest rates requires a further balance between the dual responsibilities of employment and inflation.

(This article is from Yicai)

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