(Bloomberg) — Federal Reserve officials earlier this month coalesced around a desire to keep interest rates high for longer, with “many” wondering whether the policy was restrictive enough to bring inflation back to their target.
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Minutes from the two-day Federal Open Market Committee meeting that ended May 1 showed that while participants judged the policy to be “well positioned,” several officials mentioned a willingness to tighten the policy further if warranted.
“Participants noted disappointing inflation data in the first quarter,” the minutes released in Washington on Wednesday said. The minutes showed “that it would take longer than previously expected for them to gain more confidence that inflation would move sustainably towards 2%.”
Officials also discussed keeping interest rates stable for longer “if inflation shows no signs of a sustained trend toward 2% or of a reduction in policy leverage in the event of an unexpected weakening in labor market conditions,” the minutes said.
Read more: What the Fed’s rate cut delay means for the US and the rest of the world: QuickTake
Two-year Treasury yields contributed to the gains the day after the minutes, and swap traders kept their expectations that the Fed is likely to cut rates by about 37 basis points in 2024 broadly steady.
After a rise in inflation in the first quarter, Fed officials have said they will keep interest rates at a 23-year high for longer than initially expected.
Chairman Jerome Powell said at his May 1 news conference that it would not be appropriate to cut borrowing costs until the central bank has more confidence that inflation is on a sustainable path toward the 2% target.
“We will have to be patient and let the restrictive policies do their work,” he reiterated during an event in Amsterdam on May 14.
Although officials generally viewed the policy as restrictive, policymakers raised the possibility that high interest rates will have a smaller impact than in the past and that long-term neutral rates could be higher than previously thought.
“Many participants commented on their uncertainty about the level of restrictiveness,” the minutes said.
Since the Fed meeting, April consumer price data showed a modest cooling in inflation, after three months of higher-than-hoped numbers. While price growth remains above the Fed’s target, the latest data has allayed concerns about a renewed acceleration.
The economy continues to grow at a solid pace, although recent reports on retail sales and manufacturing indicate demand is declining. The labor market remains resilient, but also shows signs of cooling down. Payrolls rose at the slowest pace in six months in April.
Balance
Officials voted at their latest meeting to slow the pace at which the central bank is shrinking its asset portfolio, lowering the limit on sovereign bond drains to as much as $25 billion from $60 billion from June.
Investors had generally expected the limit on government bonds to fall to $30 billion, not $25 billion.
The minutes showed that almost all participants expressed support for the new limit, but a “few” officials favored continuing the current pace of redundancy or a higher cap on government bonds than had been decided.
The monthly ceiling for mortgage-backed securities remained unchanged at $35 billion.
–With help from Kristy Scheuble, Amara Omeokwe, and Liz Capo McCormick.
(Updates with market reaction in fifth paragraph)
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