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Fed Minutes Show Patience on Inflation, Downside Economic Recovery Risk

Fed officials says the economy is "still far from the Committee's longer-run goals," adding that the "path ahead continued to depend on the course of the virus," according to minutes from its April rate-setting meeting

The Federal Reserve remains convinced inflationary pressures will ease in the second half of the year, minutes from its April interest rate decision revealed Wednesday, even as a "number of participants" on the Open Markets Committee said consumer prices could remain elevated well into 2022. 

Fed officials, following the lead of Chairman Jerome Powell, have been largely united in public comments with respect to their view that inflation -- which is currently running at the fastest pace since 2009 -- will slow into the later half of the year as base effects and supply chain bottle necks ease and the economy returns to full capacity in the wake of the coronavirus pandemic. 

That said, the Fed also reiterated that the world's largest economy remains a long way from the central banks goals of full employment and price stability, suggesting the current stance of record low rates and billions in monthly bond purchases will remain in place for at least the next two years. 

"[Fed staff] continued to judge that the risks to the baseline projection for economic activity were skewed to the downside and that the uncertainty around the forecast was elevated," minutes from the Fed's April 27-28 meeting read. "In particular, despite the demonstrated resilience of the economy to surges in the pandemic over the past year, the possibility that COVID-19 variants that were more contagious or more resistant to existing vaccines would spread posed a salient downside risk."

"The staff continued to view the risks around the inflation projection as balanced. On the upside, bottlenecks, supply disruptions, and historically high rates of resource utilization were seen as potential sources of greater-than-expected inflationary pressures," the Fed added. "Alternatively, the possibility that inflation would be held down by low underlying trend inflation and a weaker-than-expected response to resource utilization was seen as an important downside risk."

U.S. stocks pared gains modestly following release of the minutes at 2:00 pm Eastern time, with the Dow Jones Industrial Average trading 1.1% lower on the session at 33,673.38 points. Benchmark 10-year Treasury note yields, meanwhile, edged modestly higher, to 1.681%.

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"Many participants highlighted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases," the minutes said. "The timing of such communications would depend on the evolution of the economy and the pace of progress toward the Committee's goals."

"A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases," the Fed said.

U.S. consumer price inflation increased at the fastest pace in more than a decade last month, data from the Bureau of Labor Statistics indicated last week, as energy and used car gains boosted the headline reading amid an ongoing debate over the nature of price increases.

Headline CPI for the month of March was estimated to have risen 4.2% from last year, and 0.8% when compared to the March reading. So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.9% on the month -- the biggest gain since 1981 --and 3% on the year, the report noted.

The so-called breakeven rate between five-year Treasury bonds and five-year inflation protected securities, a key market gauge for consumer price increases, was marked at 2.72% this week, the highest since 2006 and firmly ahead of the Fed's 2% inflation target.

Wage pressures are beginning to mount in the labor market, with JOLTS job openings data indicating 8.1 million open positions, the highest on record, while last week's April non-farm payrolls reported showed average hourly earnings rise 0.7% on the month -- against a forecast of -0.1% -- and 0.3% on the year. 

"A number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year," the minutes read. "They noted that in some industries, supply chain disruptions appeared to be more persistent than originally anticipated and reportedly had led to higher input costs."