The Zhitong Finance App learned that on Wednesday, the minutes of the Federal Reserve's May meeting raised concerns about continued inflation, indicating that the central bank may not cut interest rates anytime soon.

The Federal Open Market Committee (FOMC) showed in the minutes of the April 30 to May 1 policy meeting that there has been a lack of progress in reducing inflation in recent months. The minutes of the meeting also showed that many participants discussed the possibility of raising interest rates if inflation does not continue to move towards the 2% target.

Starting in 2024, inflation is more stubborn than officials expected, according to a series of data. The Federal Reserve's target is a 2% inflation rate, but all indicators show that price increases far exceed this target.

The minutes stated: “Participants pointed out that despite some easing in inflation over the past year, there has been a lack of further progress in achieving the Commission's 2% target in recent months.” Recent monthly data showed significant increases in all components of price inflation for goods and services.

The minutes of the meeting also showed that many participants mentioned that if the risk of inflation becomes a reality, they are willing to further tighten policies and believe that such action is appropriate.

The Federal Open Market Committee voted unanimously at the meeting to maintain the benchmark short-term loan interest rate in the 5.25%-5.5% range, which is a 23-year high since July 2023.

According to the minutes of the meeting, “Participants assessed that maintaining the current target range of federal funds interest rates at this meeting was supported by data from the conference showing continued steady economic growth.”

Since then, inflation has shown some signs of gradual progress. The consumer price index for April showed an annual inflation rate of 3.4%, slightly lower than the March level. Excluding food and energy, the core CPI was 3.6%, the lowest level since April 2021.

However, consumer surveys show growing concerns. For example, according to the University of Michigan Consumer Confidence Survey, the one-year consumer confidence index was 3.5%, the highest level since November, yet overall optimism declined. A New York Federal Reserve survey showed similar results.

Risks of rising inflation

At the meeting, Federal Reserve officials pointed out some of the upward risks of inflation, especially those caused by the geopolitical crisis, and pointed out the pressure that inflation puts on consumers, especially those with lower wage levels. Some participants said that the rise in inflation at the beginning of the year was likely due to seasonal distortions, but others believed that the “broad-based” nature of these measures meant they should not be “unduly underestimated.”

Committee members are also concerned that as inflationary pressure continues, consumers will resort to riskier forms of financing to maintain balance of payments.

“Many participants indicated that there are signs that the financial situation of low- and middle-income households is under increasing pressure, and they see this as a downside risk to consumption prospects,” the minutes said. “They pointed to increased usage of credit cards and buy-and-pay later services, as well as a rise in delinquency rates for certain types of consumer loans.”

Officials are generally optimistic about economic growth prospects, although they expect inflation to ease somewhat this year. They also said that the inflation rate is expected to eventually return to the 2% target, but it is uncertain how long this will take and how much impact high interest rates will have on this process. The issue of immigration has been mentioned many times as a factor in stimulating the labour market and maintaining consumption levels.

The minutes of the Federal Reserve meeting will reflect a cautious tone

Investors will be watching how Federal Reserve officials weigh the trajectory of inflation and the details of the three interest rate cuts that officials had previously anticipated in 2024. Thierry Wizman, Macquarie's global foreign exchange and interest rate strategist, wrote that after Powell's May 1 press conference, the Fed official's speech sounded less “dovish” and more cautious than Powell's speech. “We expect the FOMC minutes released on Wednesday to have a similar tone,” he wrote. He also expects policymakers to raise their estimates of an appropriate long-term neutral interest rate over time.

“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. Last month, the US inflation data was disappointing for the third month in a row. 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 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.

A strategist at the Bank of Montreal in Canada said, “The minutes of today's Federal Reserve meeting are an indicator of the bias of monetary policy makers at the May 1 meeting. It is an uncertain factor, even though all developments during this period made the information out of date before it was officially released.” “A hawkish tone is expected, which is largely reflected in market pricing, or at least considering April's inflation data,” they wrote in a report. “On the other hand, if the Federal Reserve chooses to emphasize the employment component of its dual mission and show evidence of a more balanced labor market, then the risk is that investors will interpret this news as disproportionately bullish bonds.”

Traders reduce their bets on interest rate cuts

Traders have reduced their bets that the Federal Reserve will cut interest rates more than once this year, as the minutes of the Federal Reserve meeting show that policymakers believe that inflation may take longer than previously anticipated to ease. According to the Federal Reserve's interest rate futures, the probability that the Fed will cut interest rates before September is about 59%, which is slightly lower than the level before the minutes of the meeting were announced. Moreover, the chance of cutting interest rates for the second time before December is 50%, down from 54% earlier in the day.

Before the minutes of the Federal Reserve meeting were released, Goldman Sachs CEO Solomon said that he currently does not expect the Federal Reserve to cut interest rates this year because government spending has proven that the US economy is more flexible. He said he still hasn't seen convincing data indicating that the Federal Reserve will cut interest rates. Investments in artificial intelligence infrastructure will also help the US economy show resilience under the tight monetary policy of the Federal Reserve. The risk of some kind of “real and obvious” economic slowdown is greater than it was six months ago. Additionally, he mentioned the fragility of geopolitics, which he said is an issue that people will have to endure for a long time.