FOMC minutes reveal divisions as policymakers weigh inflation risks, labor weakness, and geopolitical uncertainty, signaling flexibility on rate hikes or cuts while emphasizing data dependence and a cautious, meeting-by-meeting approach.
The minutes of the March Federal Open Market Committee (FOMC) released Wednesday showed a deep fissure among members as they discussed the volatile geopolitical and macroeconomic environment. At the March meeting, the FOMC, led by Fed Chair Jerome Powell, decided to keep rates unchanged at 3.50%-3.75%.
To Cut or Not: The vast majority of members felt the upside risks to inflation and downside risks to employment remained elevated. Most also opined that the risks have increased with the developments in the Middle East, especially as a potential protracted conflict could lead to a further softening of labor market conditions, potentially warranting additional rate cuts.
The conflict between the U.S. and Iran that started on Feb.28 resulted in severe supply chain disruptions, driving energy prices higher. After the war raged on for more than a month, there has been some respite now as the two sides agreed on a two-week ceasefire even while continuing negotiations toward a final framework agreement.
The FOMC minutes also showed that many participants pointed to the “risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices.” They felt rate increases could be warranted to help bring inflation down to the FOMC’s 2% objective and keep longer-term inflation expectations firmly anchored. This contrasted with the messaging in the January FOMC minutes, which showed that only a smaller group of several officials expressed openness to possible rate hikes.
Too Early Yet: At the same time, most participants thought it was too early to assess the impact of the conflict on the U.S. economy, and therefore deemed it fit to “continue to monitor the situation and assess the implications for the appropriate stance of monetary policy.”
Some batted for a balanced approach in promoting the Fed’s dual mandates of employment and inflation goals, taking into account the extent of departures from those goals and the potentially different time horizons over which employment and inflation were projected to return to the targets.
Many participants judged that it would be appropriate to lower the rate if inflation were to decline in line with their expectations. A couple of them said they had pushed back their expected timing of rate cuts further into the future due to the recent inflation readings.
Some also supported a two-sided description of the future interest rate decisions in the postmeeting statement, reflecting the possibility that upward adjustments could be appropriate if inflation were to remain at above-target levels.
That said, the members were unanimous that monetary policy was not on a preset course and would be determined on a meeting-by-meeting basis.
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