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Fed Rate Hikes Still on the Table Amid Inflation Worries

EDITOR'S NOTES

The Federal Reserve’s May meeting minutes reveal a stark reality: officials remain deeply concerned about stalled progress on inflation, with many questioning if current monetary policies are stringent enough. Despite holding interest rates at a 23-year high, there’s a palpable willingness to hike rates again if necessary. Disappointing inflation data from the first quarter and robust economic momentum have prompted these worries. The minutes underscore the uncertainty among policymakers about the effectiveness of high interest rates and signal that rates could stay elevated for longer. The message is clear: the Fed is prepared to take further action to tame inflation, no matter how prolonged or restrictive the measures need to be.

Federal Reserve officials raised concerns during their May policy-setting meeting that progress on inflation is stalled, while “many” questioned whether policy was restrictive enough to tame price pressures within the economy.

Minutes from the U.S. central bank’s May meeting released Wednesday showed that officials are prepared to keep rates elevated for longer after a string of disappointing inflation readings in the first three months of the year — and willing to hike again if needed.

“Participants noted disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum, and assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent,” the minutes said.

Federal Reserve Chair Jerome Powell speaks at a press conference in Washington
Federal Reserve Chair Jerome Powell holds a press conference at the end of the two-day Federal Open Market Committee meeting at the Federal Reserve in Washington, D.C. on March 20. (Mandel Ngan/ AFP via Getty Images / Getty Images)
 

Although officials generally agree that policy is restrictive enough, they debated whether there is a possibility that high interest rates are having a smaller effect than they did in the past.

“Many participants commented on their uncertainty about the degree of restrictiveness,” the minutes said.

Policymakers signaled they will hold rates at a 23-year high longer than previously expected after a pickup in inflation during the first quarter, and suggested they are willing to restrict policy further if it’s deemed necessary.

grocery shopping
Shoppers are seen in a Kroger supermarket in Atlanta on Oct. 14, 2022. (Elijag Nouvelage/AFP via Getty Images / Getty Images)
 

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes said.

Officials voted at the May meeting to hold interest rates steady at a range of 5.25% to 5.5%, the highest level since 2001. Although policymakers left the door open to rate cuts later this year in their post-meeting statement, they also stressed the need for “greater confidence” that inflation is coming down before easing policy. 

Since then, there has been some evidence that inflation has started to ease again, albeit slowly. The April consumer price index showed that inflation cooled slightly to 3.4%, down from 3.5% the previous month, alleviating investor concerns that prices were heating up again. 

“Although inflation in April eased a bit, Fed officials need more confirmation that the trajectory is favorable for their two percent target,” said Jeffrey Roach, chief economist at LPL Financial. “In general, the committee believes policy is restrictive and so the next move for the Fed will likely be a cut later this year.”

This article originally appeared on Fox Business

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