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Federal Reserve Officials Express Inflation Concerns, Hold Off on Rate Cuts

During their latest meeting, Federal Reserve officials expressed increasing concerns about inflation, indicating hesitance to consider reductions in interest rates.

The minutes from the Federal Open Market Committee's April 30-May 1 meeting, released on Wednesday, revealed policymakers' unease about the timing for easing monetary policy.

Recent data leading into 2024 suggested that inflation was persisting more than expected. The Fed aims for a 2% inflation rate, but recent indicators have shown price increases significantly above this target.

The summary noted, "Participants observed that although inflation has decreased over the past year, recent months did not show further movement toward the Committee’s 2% goal. The latest monthly data revealed considerable rises in prices for both goods and services."

The minutes also indicated some members' readiness to tighten policy further if inflation risks escalated to warrant such measures.

At this meeting, the FOMC unanimously decided to maintain the federal funds rate between 5.25% and 5.5%, the highest in 23 years, a stance held since July 2023.

"Participants agreed that current economic data, which shows sustained robust growth, supported keeping the federal funds rate at its present range during this meeting," the minutes stated.

Since the meeting, there have been slight improvements in inflation metrics. The consumer price index for April indicated an annual inflation rate of 3.4%, a modest drop from March. The core CPI, which excludes food and energy, was at 3.6%, the lowest since April 2021.

However, consumer sentiment surveys reveal growing concerns about inflation. The University of Michigan survey highlighted a one-year inflation expectation of 3.5%, the highest since November, amidst a general decline in optimism. A similar trend was observed in a New York Fed survey.

Fed officials also recognized several factors that could drive inflation higher, such as geopolitical tensions, and noted the burden of rising prices on consumers, especially those earning lower wages. Some attendees of the meeting pointed to possible seasonal distortions in the early-year inflation spike, but others cautioned against dismissing the widespread nature of these price increases.

Concerns were also raised about consumers increasingly turning to riskier financing options like credit cards and buy-now-pay-later schemes, as well as rising delinquency rates on certain consumer loans, which could pose risks to future consumption.

Officials remained generally positive about growth prospects, though they expected some moderation and expressed uncertainty about the timeline for inflation to return to the 2% target and the impact of high interest rates on this process.

The role of immigration in supporting the labor market and sustaining consumption levels was also discussed several times.

In public comments following the meeting, Fed officials have adopted a cautious stance. Fed Governor Christopher Waller indicated on Tuesday that while he doesn't foresee a need for rate increases, he would need several months of favorable data before considering a rate cut. Chair Jerome Powell maintained a less hawkish tone but emphasized the need for patience to let restrictive policies mitigate inflation.

Market expectations for interest rate cuts have been recalibrated, with futures now showing about a 60% likelihood of a rate cut in September and a slightly better than even chance for a second cut in December. This marks a significant shift from earlier predictions of up to six quarter-point cuts this year.


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