As expected, the Federal Open Market Committee (FOMC) kept interest rates unchanged at 5.25-5.50% during its May meeting.
At that time, members also agreed to slow the pace of reducing bond holdings on their balance sheet, leading to a slight easing of monetary policy.
But the meeting minutes printed this week also noted members' concerns that while inflation is still expected to return to 2% in the medium term, the process of lower inflation is likely to take longer than previously thought.
The minutes of the May meeting detail the following:
- The expected pace of inflation slowdown was slower than in the March forecast
- Recent data “did not increase their confidence” that inflation is heading toward their 2% target.
- Recent increases in inflation have been “broad-based” and therefore we should not dismiss them too far.
- Members are unsure about the “degree of restraint” of higher interest rates, noting that “Higher interest rates may have smaller impacts than in the pastOr that “the potential production level may be lower than expected.”
- Inflation risks are skewed to the upside, reflecting potential supply disruptions and unexpectedly persistent inflation dynamics
- Growth risks are tilted to the downside, as deteriorating household finances “may act as a bigger drag on activity” than experts had expected.
Link to the official May 2024 FOMC meeting minutes
The document also revealed that “Many participants indicated a desire to tighten the policy furtherAlthough Powell downplayed this possibility, calling it “unlikely” in his press conference earlier this month.
Market reactions
US dollar against major currencies: 5 minutes
Overlay of the US dollar against major currencies Chart by TradingView
The US dollar, which saw widespread weakness after weaker-than-expected US existing home sales data, began to recover from session lows about an hour before the Federal Open Market Committee meeting minutes were released.
The US dollar received additional support when the Federal Reserve dropped its hawkish report and the US dollar gained new ground especially against its counterparts such as the Australian dollar and the New Zealand dollar.
However, the US dollar failed to extend its upward momentum. The dollar began to recover some of its gains about an hour after the meeting minutes were released, capping the day below pre-report levels against the New Zealand dollar and maintaining its gains against the Australian dollar and the British pound.
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