Earlier this week, some officials at the Federal Reserve said they’re no longer worried about inflation reaccelerating, after data showed that progress stalled in the first quarter. Optimism spurred by the latest inflation data pushed all three major stock indexes to new record highs. But now Wall Street, eager for rate cuts, is on edge again.
That’s because minutes from the central bank’s latest policy meeting released Wednesday showed that “various” officials said they would be willing to raise interest rates if necessary and that there were doubts as to whether financial conditions are restrictive enough to keep inflation from resurging.
It spooked investors: The Dow slid more than 300 points following the release of the minutes.
Moreover, the Fed minutes seemed to outweigh comments from Fed Governor Christopher Waller, a key messenger of monetary policy moves, who told CNBC in an interview Tuesday that the Fed could cut rates by the “end of the year.” In a separate speech earlier that day, he said “the data suggests that inflation isn’t accelerating.”
“More recent data on the economy indicate that restrictive monetary policy is helping to cool off aggregate demand and the inflation data for April suggests that progress toward 2% has likely resumed,” Waller said at an event hosted by the Peterson Institute for International Economics.
He pointed to recent figures on employment and retail spending coming in weaker than expected, both of which should help take some steam out of inflation.
But some financial leaders remain doubtful that the Fed is feeling confident enough to cut rates soon. Goldman Sachs CEO David Solomon said Wednesday at an event hosted by Boston College that the Fed probably won’t begin to cut rates this year.
“I’m still at zero cuts,” he said. “I think we’re set up for stickier inflation.”
Fed officials have mostly sounded a little more optimistic about inflation recently, after the Consumer Price Index for April finally provided some welcome news. The inflation report was mostly in line with expectations, which was an improvement from the disappointing figures for the first three months of the year.
“It’s important not to focus too much on just one data point,” said Fed Vice Chair Philip Jefferson at an event hosted by the Mortgage Bankers Association on Monday. However, he noted that the April CPI data was nonetheless “a good sign for us.”
San Francisco Fed President Mary Daly told Axios in an interview that published Monday that she doesn’t “see any evidence right now that we need to adjust upwards.”
Fed Chair Jerome Powell said earlier this month that it may just be a matter of giving high interest rates some time to kick in.
“What that has told us is that we’ll need to be patient and let restrictive policy do its work,” he said during a moderated discussion with European Central Bank Governing Council member Klaas Knot.
Cleveland Fed President Loretta Mester told Bloomberg on Monday that she also thinks interest rates are high enough to deal with inflation. But despite the hopeful Fedspeak on inflation, there is still an uneasiness in the air about what’s really happening and what the central bank will do.
“For now, the Fed says it wants to see more evidence that inflation is easing, which implies higher-for-longer rates until that data materializes,” wrote Chris Larkin, managing director of trading and investing for E*TRADE in a note Wednesday.
“Traders will have to wait until next week’s PCE price index to get another read on inflation and update their expectations for rate cuts,” he said.
The April Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, is due next Friday at 8:30 am ET, along with data on household incomes and spending.
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