The members who decide on the monetary policy of the Federal Reserve System (Fed) are reportedly expecting a delay in interest rate cuts from their initial projections. In the first quarter of this year, inflation indicators were stronger than expected, leading to the conclusion that interest rates need to be maintained at current levels longer than previously anticipated. After the release of the minutes containing this information by the Federal Open Market Committee (FOMC), the New York stock market closed lower on the 22nd.
The minutes released on that day cover a two-day FOMC meeting held from April 30 to May 1. According to the minutes, while the members believe that interest rates are very high enough to dampen the economy and inflation, they are uncertain whether interest rates will help suppress inflation. Various members mentioned in the minutes that they are willing to strengthen policies further if inflation risks materialize. At the previous meeting, the Fed decided to keep the benchmark interest rate at the highest level in over 20 years, ranging from 5.25% to 5.50%. The Fed has maintained interest rates unchanged since July last year.
Inflation in the U.S. noticeably slowed down in the second half of last year, and in March, Fed Chairman Jerome Powell suggested that interest rate cuts could be considered if inflation remains moderate for 1-2 months. The Personal Consumption Expenditures (PCE) price index, which the Fed uses as a basis for monetary policy, excluding energy and food, increased by 0.1-0.2% month-on-month from October to December last year. As a result, the market expected the Fed to cut interest rates three times this year.
However, the minutes mentioned that “members referred to disappointing figures for first-quarter inflation” and stated that “it will take longer than expected to gain reassurance that inflation is moving sustainably towards the Fed’s target of 2%.” The possibility of interest rate cuts was hindered by PCE increasing by 0.5% year-on-year in January and rising by 0.3% for two consecutive months until March. Additionally, in April, the U.S. Producer Price Index rose by 0.5% month-on-month, surpassing market expectations of 0.3%.
Considering recent comments from Fed members, the market believes that the possibility of a rate hike is unlikely. Fed Chair Christopher Waller stated at an event in Washington that “the current possibility of a rate hike is very low” and that “the next step for the Fed is more likely to be a cut than an increase, but if inflation does not fall as much as policymakers expected, the central bank doesn’t necessarily need to cut rates this year.” Fed Chair Powell also stated after the recent FOMC meeting that “the next move will not be a rate hike.”