The discussions at the March FOMC meeting seem secondary considering the hot March CPI report. Nonetheless, the minutes showed that most Fed officials believe financial conditions have “eased modestly” since the last FOMC meeting in January with “higher equity prices more than offsetting increases in interest rates”. They also noted that Treasury yields had risen between meetings with the increase due to “inflation compensation”. Consequently, “participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2%”. That view is likely to be reinforced by the latest jump in inflation.

In terms of the balance sheet, participants believe that the runoff is “proceeding smoothly” and “the vast majority of participants thus judged it would be prudent to begin slowing the pace of runoff fairly soon”, which would give the committee “more time to assess market conditions as the balance sheet continues to shrink”.

In the outlook section, the staff stated risks around the inflation forecast were “tilted slightly to the upside”, while risks around the economic forecast were viewed as “skewed a little to the downside, as any substantial setback in reducing inflation might lead to a tightening of financial conditions that would slow the pace of economic activity by more than the staff anticipated in their baseline forecast”.

Bottom line: The minutes were overshadowed by the hotter-than-expected March CPI data, which will only validate the committee’s concerns over the persistence of high inflation. With inflation clearly heading in the wrong direction, the Fed might need to remain on hold for longer.

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