Inflation and balance sheet shrinkage message in Fed minutes

The Fed meeting minutes showed that officials were concerned about inflation and that some members were ready to tighten monetary policy if inflation risks increased. The minutes also conveyed messages about the pace of balance sheet reduction. The minutes of the Fed’s April 30-May 1 meeting were published. The minutes signaled that Fed officials did not have enough confidence to cut interest rates. The Fed announced on May 1 that it would reduce the amount of balance sheet reduction from $60 billion to $25 billion per month starting in June in order to reduce the risk of turbulence that could arise from the balance sheet reduction. The minutes show that almost all officials supported the balance sheet reduction process, while a few officials indicated that they would support the balance sheet reduction amount remaining at previous levels. The minutes referred to the recent rise in inflation and stated, “Participants observed that while inflation slowed last year, the Committee has struggled to move toward its 2 percent goal in the past few months. Gaining greater confidence in inflation will take longer than expected.” The minutes indicated that some officials pointed to geopolitical events or other factors that could lead to more serious supply bottlenecks or higher transportation costs, which could put upward pressure on prices and negatively impact economic growth. The Fed left interest rates unchanged at the meeting, which took place after inflation data exceeded estimates in the past few months in the US, at a range of 5.25-5.5 percent. In the minutes, some participants stated that if risks emerged in inflation, an increase in interest rates would be appropriate. Some members also drew attention to the risk that financial conditions were too loose.