The Federal Reserve has released the minutes from its latest meeting, where interest rates were kept unchanged. The released texts contain noteworthy assessments regarding both the inflation outlook and the impact of geopolitical risks on the economy.

According to the minutes, Fed economists revised their expectations for the U.S. economy downwards. Compared to the January projections, they foresaw weaker economic activity, while generally assessing current monetary policy as being “in an appropriate position.” A majority of participants agreed that the policy rate was within a reasonable neutral range.

On the other hand, attention was drawn to the increasing risks regarding the inflation outlook. The vast majority of participants stated that the process of inflation reaching the 2% target may be slower than expected and that the risk of it remaining above the target has increased. It was noted that the increase in oil prices and geopolitical developments could increase inflationary pressures, and according to some officials, this could even justify an interest rate hike.

The minutes strongly emphasized that developments in the Middle East were increasing economic risks. In particular, tensions and the war environment surrounding Iran were cited as deepening uncertainties, and most participants stated that predicting the impact of these developments on the US economy was difficult. It was also assessed that the war could slow down the process of reducing inflation.

However, Fed officials believe that the impact of the decline in stock markets and the rise in oil prices on economic activity is currently “l(fā)imited”.

Regarding the monetary policy outlook, a notable divergence emerged. An increasing number of officials argued that a “two-pronged” approach (including the possibility of both increases and decreases) should be adopted in future interest rate decisions. The number of those supporting this approach was reported to be growing.

Expectations regarding interest rate cuts have been postponed. Many participants stated that they have deferred their assessments of the timing of interest rate cuts to a later date, while almost all members agreed against a rate cut at the March meeting. However, it was added that if inflation falls as expected, interest rate cuts may become appropriate.

Risks to the labor market were also included in the minutes. It was noted that prolonged conflicts could lead to a weakening of the employment market, which could pave the way for future interest rate cuts. Participants pointed out that both the upside risks to inflation and the downside risks to employment were at high levels.

*This is not investment advice.

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