Fed Minutes Continue to Underscore Fed’s Data Dependent Approach

The minutes from the April 30-May 1, 2024 Federal Open Market Committee (FOMC) interest rate announcement acknowledged the recent lack of progress in curtailing inflation and continued to highlight the upside risks to the inflation outlook.

Specifically, Committee members noted that, “the recent increases in inflation had been relatively broad based and therefore should not be overly discounted.” At the same time, Committee members noted that the disinflation process would likely take longer than previous thought.

When discussing the appropriate policy actions, “all participants judged that, in light of current economic conditions and their implications for the outlook for employment and inflation, as well as the balance of risks, it was appropriate to maintain the target range for the federal funds rate at 5¼ to 5½ percent.”

On future policy decisions, participants continued to note that the “future path of the policy rate would depend on incoming data, the evolving outlook, and the balance of risks.” Some members cited a willingness to increase rates should it be required given the inflation backdrop.

In examining the restrictiveness of current policy, several members expressed “uncertainty” on the degree of policy restriction. This uncertainty stems from a host of factors including the potential that policy may be having smaller effects than in the past given the upward drift in the neutral rate.

Key Implications

Today’s minutes continued to underscore the Fed’s willingness to maintain rates at their current levels, giving today’s restrictive policy stance more time to work. With Chair Powell and other FOMC members recently acknowledging the “lack of further progress”, market pricing for the first-rate cut has been pushed to November.

Since the May FOMC meeting, the April reading on inflation broke the string of three consecutive prints which surprised to the upside registering just below expectations. Nonetheless, one good inflation print is unlikely to give the Fed confidence that inflation is once again trending favorably. We expect inflation to gradually drift lower through the second half of the year, but with progress likely to come more incrementally, the first-rate cut is not expected until the fourth quarter.