Ebbing takes time
Fed expects a longer wave of inflation
22.05.2024, 21:43
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The US central bankers continue to assume that their inflation target of two percent will be achieved in the medium term. However, they admit that the wave of inflation will take longer to subside than initially assumed. Traders still believe a rate cut in September is likely.
Despite the recently stubbornly high inflation, the US Federal Reserve continues to rely on a decline in price pressures on the way to a turnaround in interest rates. This is evident from the minutes of the most recent monetary policy meeting. The participants are therefore unwaveringly assuming that their inflation target of two percent will be achieved in the medium term. However, they admitted that the ebbing of the wave of inflation will probably take longer than initially assumed.
After the minutes were published, traders continued to assume that a first interest rate cut would take place in September. However, the chances of a second cut in December were only estimated at around 50 percent. The minutes, which did not give new impetus to interest rate speculation, created a cautious mood on the stock market. The most important indices on Wall Street settled just below the losses of almost half a percent each that they had increased around half an hour before the publication.
The US monetary authorities, led by central bank chairman Jerome Powell, decided on May 1 to leave the key interest rate in the range of 5.25 to 5.50 percent. The Federal Reserve then declared that there had been no further progress towards the inflation target of two percent in recent months. A change in interest rates was not appropriate as long as the monetary authorities were no longer confident that the inflation rate would move sustainably closer to the Fed’s target. Powell had already indicated that the high interest rate policy would have to continue for a longer period in order to break the wave of inflation.
As the minutes show, an interest rate hike is not taboo. Various participants expressed their willingness to tighten monetary policy further if the inflation risks become so concrete that such a step would be appropriate. However, Fed Board member Christopher Waller recently said that data indicated that inflation was not increasing. Further key interest rate hikes were therefore probably unnecessary. The inflation rate fell slightly in April to 3.4 percent from 3.5 percent in March.