Some Fed members are not ruling out further rate hikes given the strength of US inflation
The Federal Reserve released minutes this Wednesday from its early May meeting, a meeting marked by poor inflation data released a few weeks earlier. CPI data for April raised doubts within the institution about the level of restrictions monetary policy is currently maintaining in the world’s largest economy, and there were members who were prepared to raise rates further if the price index continued to show signs of strength. The US stock market reacted to the reading of the protocol with a fall, which shortly before the close of Wall Street stabilized at around 0.4% for the S&P 500 index, which is now trading at around 5303 points.
Inflation data published in the US on April 10 had an impact on the sentiment of the Federal Reserve. The price index rose more than expected in March to an annualized 3.5%, prompting some members of the Federal Open Market Committee (FOMC) to rethink that markets are no longer waiting for two rate cuts. a year, if not, then even, the possibility of them increasing at some point if the consumer price index continues to produce alarming data.
“Although monetary policy continues to be perceived as restrictive, many participants expressed their doubts about the level of restrictions in place,” the minutes said. “These members perceive this uncertainty due to the possibility that high interest rates will have less impact than in the past, or that the neutral interest rate will be higher than previously expected,” the document emphasizes. The reference to a neutral interest rate (the level at which ECB rates do not affect the economy or inflation) is key because it could force the Fed to take decisive action in the form of new rate hikes in the future.
“Some members have signaled their willingness to tighten monetary policy further if inflation risks materialize.” and force this movement to be the most appropriate,” the Fed admits in the minutes. This is not a promise of rate hikes, but it does reflect a significant change in position on the part of members of the US central bank. how did investors perceive it? reacted with massive sales in the US stock market: The S&P 500 index fell by 0.24% before the publication of the protocol, and immediately after reading it deepened its decline until it lost more than 0.5% during the session. For its part, the Dow Jones extended its losses to top 0.60%, while the Nasdaq 100 fell more than 0.30%.
The role of the labor market
On the other hand, some members noted that a weakening labor market could signal the start of rate cuts. In this sense, the Fed concluded that the labor market is developing correctly, although it does so at a leisurely pace. This is evidenced by a decrease in the unemployment rate, a decrease in the number of resignations and a decrease in applications for unemployment benefits, the minutes say. Added to this is that companies have less difficulty recruiting and retaining employees.
However, the central bank remains cautious, pointing out that labor market conditions remain very tight in the context of strong wage growth and low unemployment.
The fundamental plan remains the same, and the Fed wants to wait to see whether the March panic is just a temporary phenomenon or whether inflation will be more stubborn than expected, but The minutes demonstrate real concerns on the part of some members of the organization that should be taken seriously. Of course, we must remember that the minutes included the conclusions of the meeting on May 1, and later, on the 15th of the same month, inflation data for April was published, which gave the Fed a small respite, coinciding with analysts’ estimates. .
So the Fed appears to remain committed to staying the course and continuing its original plan to cut rates at least once this year, but She will be especially vigilant and ready to change her mind if the situation demands it. On May 14, Jerome Powell, the Fed’s president, commented on the organization’s current situation and insisted that “we need to be patient and allow restrictive monetary policy to do its job.” The big question is whether the level of restrictions is appropriate or whether rates will have to be raised again to curb rising prices.