April 12, 2023 | 14:29
FOMC Minutes: Still Stressed About Inflation
It was a close call in March, but ultimately inflation concerns trumped financial stability risks to warrant another quarter-point rate hike. With core inflation still running high, there's no reason to expect a different outcome in May, assuming the banking sector stress remains contained.
Quick policy actions and some stability in financial markets prior to the March 22 announcement opened the door for another rate hike, even though the fallout was expected to dampen the economy and warranted a lower terminal fed funds rate than what policymakers were eyeing. While "several" members considered a pause in March, they took solace in the recent calming in financial conditions. The minutes suggest that the FOMC doesn't believe the bank turmoil and the attendant tightening in lending conditions will complete the job of restoring price stability. In fact, they were disappointed in seeing slower progress on inflation, largely due to sticky services prices. They still see the inflation risks tilted to the upside.
Bottom Line: Barring renewed bank stress, the Fed is on track for another rate increase in May, as underlying inflation pressures remain intense. At that time, they will likely consider an extended pause to assess the impact of past rate hikes and tighter lending conditions on the economy and inflation.