Wall Street Journal: Fed officials saw longer wait for rate cuts after inflation setbacks

Federal Reserve officials concluded at their most recent meeting they would need to hold interest rates at their current level for longer than they previously anticipated after a third straight disappointing inflation reading last month, the Wall Street Journal said.

While officials continued to think interest rates were high enough to slow the economy and inflation, they signaled they were less certain over the degree to which rates would restrain activity and price pressures, according to minutes of the April 30-May 1 meeting, which were released Wednesday with a customary three-week delay.

An unspecified number of officials “mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate,” said the written account of the meeting.

Officials voted to hold their benchmark federal-funds rate steady in a range between 5.25% and 5.5%, the highest level in more than two decades. They have held rates at that level since July, when they concluded the most rapid series of interest-rate hikes in 40 years to combat high inflation.

The Wall Street Journal said that Price pressures slowed notably through the second half of last year, and Fed leaders in March had suggested they might be prepared to start cutting rates with one or two additional months of mild inflation. But a run of data in the first quarter revealed simmering price pressures in the economy, and the Fed has been forced to table any deliberations about beginning rate cuts for the next few months unless the labor market weakens unexpectedly, the US newspaper said.

“A measure of inflation that strips out volatile food and energy prices stood at 2.8% in March from a year earlier, down from 4.8% in March 2023. But the 12-month measure masks the more recent setbacks: Over the six months through March, prices rose at an annualized 3.0% rate, up from 1.9% for the six months ended in December. The Fed targets 2% inflation over time,” the paper added.

Since officials last met, government data on April inflation suggest price pressures havent reaccelerated, providing an extra measure of comfort that the central bank wont need to resume rate increases, it said.

“Right now, the probability of rate hikes is very low,” the Wall Street Journal quoted Fed governor Christopher Waller as saying at an event in Washington on Tuesday. While the Feds next move was more likely to be a reduction rather than an increase, the central bank doesnt necessarily need to cut interest rates this year if inflation doesnt decline as much as officials have anticipated, he said.

Fed officials, the paper said, are trying to navigate two risks. One is that they ease too soon, boosting spending, investment and asset prices in a way that keeps inflation from returning back to their 2% target. The other is that they wait too long for evidence that tighter policy is slowing labor markets, forcing the more traditional series of rate cuts that has often coincided with the start of an economic downturn.