FOMC Minutes: Fed Leaves Door Open to Possible Interest Rate Cut in September

Despite expressing disappointment over recent inflation readings, Federal Reserve officials at their latest policy meeting indicated they still believed price pressures would gradually ease. This sentiment was reflected in the Minutes of the Fed session from April 30 to May 1.

Although the current policy response “would involve maintaining” the central bank's benchmark interest rate at its current level, the Minutes released on Wednesday also included discussions about possible further hikes.

The Minutes also revealed a debate about the restrictive nature of current monetary policy in light of the strength of the economy. This debate is crucial, given the need for policy to be “sufficiently” restrictive to curb inflation.

Currently, policymakers seem inclined to keep the Fed's benchmark rate in the 5.25%-5.50% range at least until September, after their confidence in easing price pressures was undermined by inflation higher than expected during the first three months of this year.

The Federal Reserve is expected to keep its monetary policy unchanged in June and July.

As expected, the Federal Reserve left its monetary policy unchanged after the April 30 and May 1 meeting. In its monetary policy statement, the US central bank stated that there has been no recent progress towards the 2% inflation target. As for the quantitative tightening strategy, the Federal Reserve said it will slow balance sheet reduction by cutting the Treasury reimbursement limit to $25 billion a month from $60 billion starting June 1.

At the post-meeting press conference, Federal Reserve Chair Jerome Powell noted that the next policy move was unlikely to be another rate hike, but explained that postponing interest rate cuts might be appropriate. if inflation proves more persistent and the labor market remains strong. Powell reiterated that they need to have greater confidence that inflation is moving towards 2% before considering a shift in policy.

Data released by the US Bureau of Labor Statistics showed on May 15 that the core Consumer Price Index (CPI) rose 3.6% annually in April. This data, which follows the 3.8% increase recorded in March, coincides with market expectations. In monthly terms, both the CPI and the core CPI increased by 0.3%, after having increased by 0.4% in March.

According to the CME's FedWatch tool, markets see little chance of the Federal Reserve cutting rates in June or July. However, the probability that the Fed will maintain the official interest rate in September remains around 37%.