Fed Minutes Show Officials Wanted More Proof Inflation Is Falling. They Didn’t Get It.

The FOMC held its federal-funds rate target range steady at 5.25% to 5.50% at the meeting, but indicated that data permitting, the next move in rates would be down.

Data on hiring and inflation for March released over the past few days makes officials’ three-week-old assessment of the economic situation somewhat moot. It extends a streak of hotter-than-expected economic and inflation data to a third month: The core CPI was up 3.8% from a year earlier in March.

“In their discussion of inflation, participants observed that significant progress had been made over the past year toward the Committee’s 2% inflation objective even though the two most recent monthly readings on core and headline inflation had been firmer than expected,” the minutes read. “Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations. However, a few participants noted that residual seasonality could have affected the inflation readings at the start of the year.”

Officials had already been pushing up their growth and inflation expectations before the March data. At last month’s FOMC meeting, policymakers’ quarterly Summary of Economic Projections, or SEP, showed a median estimate of a 2.6% increase in 2024 for the core personal consumption expenditures price index, which excludes food and energy costs and is the Fed’s preferred inflation measure. That was up from 2.4% in the December SEP.

Officials also penciled in higher interest rates in future years than they had in December estimates, while maintaining a median forecast for three quarter-point reductions in the fed-funds rate in 2024.

“In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected,” the minutes read. “In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven. “

While interest-rate futures pricing didn’t move much after the March FOMC meeting, it shifted significantly on Wednesday after the March inflation data to imply less reduction in the fed-funds rate this year. Before the report, markets were pricing in the greatest odds of a total of 0.75 percentage point in cuts in 2024, in line with the March SEP, starting in June.

By Wednesday afternoon, futures implied overwhelming odds of no change in the fed-funds rate in May or June, followed by roughly 40% odds of a cut in July and 65% in September. The greatest odds were for a total of 0.5 percentage point of reductions in 2024.

Fed officials began discussing a potential slowing of the pace of reductions to the central bank’s holdings of Treasury debt and mortgage-backed securities. Policymakers were interested in starting the process sooner rather than later.

“Slower runoff would give the Committee more time to assess market conditions as the balance sheet continues to shrink,” the minutes read. “It would allow banks, and short-term funding markets more generally, additional time to adjust to the lower level of reserves, thus reducing the probability that money markets experience undue stress that could require an early end to runoff.”

Echoing remarks from Fed Chairman Jerome Powell at his postmeeting press conference on March 20, the minutes explain that slowing down the pace at which the bank cuts its securities holdings doesn’t necessarily mean it will reduce them by less. “The decision to slow the pace of runoff does not mean that the balance sheet will ultimately shrink by less than it would otherwise,” the minutes read.

The Fed’s enormous securities purchases during the Covid-19 pandemic caused its balance sheet to balloon to record levels as policymakers sought to increase liquidity in markets and boost reserves in the U.S. financial system.

Since 2022, the Fed has been scaling back its balance sheet at the pace of $60 billion a month for Treasuries and $35 billion for mortgage-backed securities, for a total reduction of some $1.5 trillion since then. Policymakers favored at first reducing the pace of runoff by about half, according to the minutes. 

Investors will hear from four Fed presidents in the coming days. New York’s John Williams and Boston’s Susan Collins will speak at separate events on Thursday, followed by remarks from Atlanta’s Raphael Bostic and San Francisco’s Mary Daly on Friday.

The FOMC’s next meeting will be held from April 30 to May 1.

Write to Nicholas Jasinski at [email protected]