The Federal Reserve does not rule out another rise in US inflation, the latest meeting’s minutes show.
The US Federal Open Market Committee (FOMC) released the minutes of its last meeting, showing high uncertainty over the future of inflation. The Federal Reserve met in early May and left interest rates at their 23-year high of 5.25-5.50%.
Following the meeting, April’s inflation report confirmed that, though prices are cooling, they do so at a far slower pace than expected. In April, year-on-year inflation amounted to 3.4%. The core value, which excludes volatile goods like energy and food, remained stable at 3.6%.
The US Federal Reserve considers 2% the ideal annual target for inflation. Following the COVID-19 pandemic and the Russian invasion of Ukraine, US inflation soared and almost reached 10% in June 2022.
Since then, prices slowly declined, with their lowest level yet in December 2023 at 2.9%.
However, the beginning of 2024 showed an unexpected recovery in economic activity, as well as strong resilience by American consumers. The US GDP expanded far more than expected in Q3 2023, and the job market remained solid with unemployment at historically low levels.
The better-than-expected economic performance delayed what were expected to be three rate cuts in 2024. Now analysts predict only one cut in 2024, with many even forecasting none.
The Fed’s minutes
The minutes of the latest Fed meeting reflect the same uncertainty gripping markets.
“Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the minutes’ summary said. “The recent monthly data had showed significant increases in components of both goods and services price inflation.”
Moreover, Fed officials noted that geopolitical risks could tip inflation back up again. When Iran launched its retaliatory attack against Israel, for example, oil prices could have rallied above the $130 per barrel level.
Such a sudden increase in oil prices would have raised prices across the board. Unfortunately, the current situation in the Middle East cannot rule out such a possibility.
At the same time, the committee acknowledged the difficult financial situation of US households. Specifically, they pointed to “increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”
In May, a slew of worse-than-expected economic data perhaps showed the first true effects of the rate hikes. However, it’s still too early to call it a day for the Fed.
