During the most recent Federal Reserve meeting, officials expressed growing concerns about inflation, indicating a lack of confidence in moving forward with interest rate reductions. Inflation had been more stubborn than anticipated, with price increases running well above the Fed’s target of 2%. Some participants mentioned a willingness to tighten policy further if risks to inflation materialized. The FOMC voted unanimously to maintain the benchmark rate at 5.25%-5.5%, citing continued solid economic growth as the reason for their decision.
There have been some incremental signs of progress on inflation since the meeting, with the consumer price index for April showing a 3.4% annual rate of inflation, slightly below the March level. However, consumer surveys indicate increasing worries about inflation. Fed officials noted upside risks to inflation, particularly from geopolitical events, and expressed concerns about the pressure on consumers, especially those on lower wages. Some participants suggested that the increase in inflation earlier in the year may have been due to seasonal distortions.
The committee also discussed the financial strains on low- and moderate-income households, who were increasingly turning to riskier forms of financing as inflation pressures persisted. Despite concerns about inflation, officials remained largely optimistic about growth prospects, expecting some moderation this year. They anticipated inflation eventually returning to the 2% objective but were uncertain about the timeline. Immigration was mentioned as a factor contributing to labor market growth and sustaining consumption levels.
Public remarks from central bankers since the meeting have taken on a cautionary tone. Fed Governor Christopher Waller stated that he does not expect the need to raise rates, but would need to see several months of good data before voting to cut rates. Chair Jerome Powell expressed a similar sentiment, emphasizing the need for patience and letting restrictive policy address inflation concerns. Market expectations for rate cuts this year have shifted, with futures pricing indicating a 60% chance of the first reduction in September and a more uncertain outlook for a second move in December. Earlier in the year, markets had been pricing in at least six quarter-percentage point cuts.
