Federal Reserve officials earlier this month coalesced around a desire to hold interest rates higher for longer and “many” questioned whether policy was restrictive enough to bring inflation down to their target.

Minutes from the two-day Federal Open Market Committee gathering ending May 1 showed that, while participants assessed that policy was “well positioned,” various officials mentioned a willingness to tighten policy further if warranted.

“Participants noted disappointing readings on inflation over the first quarter,” according to the minutes released Wednesday in Washington. The minutes showed “that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2%.”

Officials also discussed holding rates steady for longer “should inflation not show signs of moving sustainably toward 2% or reducing policy restraint in the event of an unexpected weakening in labor market conditions,” the minutes said.

The two-year Treasury yield added to its increases on the day after the minutes, and swaps traders held about stable their outlook that the Fed is likely to cut rates in 2024 by about 37 basis points. 

Following a first-quarter pickup in inflation, Fed officials have said they will hold interest rates at a 23-year high for longer than initially anticipated.

Chair Jerome Powell said at his May 1 press conference that it wouldn’t be appropriate to lower borrowing costs until the central bank has greater confidence that inflation is on a sustainable path to its 2% target.

“We’ll need to be patient and let restrictive policy do its work,” he reiterated at an event in Amsterdam on May 14.

Though officials viewed policy as generally restrictive, policymakers pointed to the possibility of high interest rates having a smaller effect than in the past and that the long-run neutral rate may be higher than previously thought.

“Many participants commented on their uncertainty about the degree of restrictiveness,” the minutes said.

Since the Fed’s meeting, April consumer price data showed a modest cooling in inflation following three months of higher-than-hoped readings. While price growth remains above the Fed’s goal, the latest figures alleviated some concern that it was reaccelerating.

The economy continues to grow at a solid pace, though recent reports on retail sales and manufacturing suggest demand is easing. The labor market remains resilient but is also showing signs of cooling. Payrolls rose at the slowest pace in six months in April.

Balance Sheet
Officials voted to slow the pace at which the central bank is shrinking its asset portfolio at their latest meeting, reducing the cap on runoff for Treasuries to as much as $25 billion from $60 billion starting in June.

Investors had generally expected the cap on Treasuries to fall to $30 billion, not $25 billion.

The minutes showed almost all participants expressed support for the new cap, however, a “few” officials supported continuing the current pace of runoff or a higher cap on Treasuries than was decided on.

This article was provided by Bloomberg News.