Federal Reserve officials at their recent meeting believed the central bank could remain “patient” in deciding when to adjust interest rates, though some officials thought future rate hikes might still be needed.
In minutes of the April 30-May 1 discussions released Wednesday, Fed officials noted that prospects for the U.S. and global economy had been improving, while inflation had fallen farther below the Fed’s 2% target.
Financial markets and President Donald Trump are hoping that the central bank will start cutting rates soon to bolster growth further. The Fed minutes, however, indicated little sentiment for rate cuts.
Instead, the minutes revealed “a few” participants say they thought more rate increases might be needed to keep low unemployment from triggering unwanted inflation.
At its last meeting, the Fed kept its key policy rate unchanged in a range of 2.25% to 2.5%, where it has been since the Fed hiked rates for a fourth time last year.
That December rate boost contributed to a nosedive in financial markets as investors began to worry that the central bank was in danger of over-doing its credit tightening and could send the country into a recession.
Leading the criticism was Trump, who labeled the Fed his “biggest threat” and attacked Fed Chairman Jerome Powell and other Fed officials for not understanding financial markets.
In January, the Fed did an about-face in response to a worsening global outlook and other risks to growth and began signalling they would be “patient” in changing interest rates. While they had projected in December two more rate hikes this year, they now expect to hold steady for the year.
However, Trump has complained that the Fed needs to go further to support the economy by cutting rates and restarting a program to buy bonds to put downward pressure on long-term rates. In contrast, the Fed has been trimming its bond holdings, although it has announced these reductions will come to an end later this year.
The minutes did not reveal support for the type of dramatic credit easing suggested by Trump. But there was discussion among Fed officials about the fact that inflation this year has moved further below the Fed’s 2% target.
“In light of recent, softer inflation readings, some [Fed officials] viewed the downside risks to inflation as having increased,” the minutes said.
But the minutes said that Fed officials still believed a return of inflation to the Fed’s 2% target was “the most likely outcome.”
At his May 1 press conference, Powell said Fed officials believed the recent slowdown in inflation was likely due to transitory issues, with inflation in coming months resuming its climb toward the Fed’s target.
In a research note, CIBC World Markets senior economist Royce Mendes noted the meeting took place before trade tension between the U.S. and China intensified this month. The increase in trade risk means some members may be more cautious about the outlook now, he said.
“Still, with many policymakers viewing the recent dip in inflation as transitory and the trade war having yet to materially impact economic activity, the Fed appears set to remain on hold for the time being,” he said.