Minutes from the Federal Reserve’s May meeting highlight major concern about U.S. inflation and a strong commitment to contain it. The minutes reflect the decisions taken earlier in May with the minutes released 3 weeks after the meeting occurred. Although, the stock market has sold off further since the minutes were released with the S&P 500 entering a bear market, the Fed showed little concern for declining asset prices, mentioning that the valuation for many assets are “elevated”.

Inflation Risks

The Fed is worried about inflation. Of course, given inflation is well over the Fed’s target of 2% today, that should come as a surprise. However, the Fed discussed the risks that Chinese lockdowns and the war in Ukraine could push inflation even higher from current levels. The notes also mentioned that price pressures were “broadening” to core goods and services, when compared to the more focused spike in commodity prices that initially drove prices up last year. They also mentioned that it is potentially “too early to be confident that inflation has peaked.”

Throughout the minutes the Fed’s concern was clear that current inflation was not under control.

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Financial Markets

In contrast, the Fed showed little concern for financial markets. They noted that the valuation of many assets remained elevated. That likely includes the stock market where the S&P 500 even after its decline still trades at relatively high valuations compared to history. The Fed was less concerned about house prices even though they had risen sharply as underwriting standards for mortgages appear a lot more robust than in 2008 in the Fed’s view.

Strong Employment Situation

Although perhaps less concerned about financial markets, the Fed is monitoring unemployment closely, and takes comfort that the currently strong jobs market gives the Fed some ability to raise rates aggressively.

The Fed also discussed the negative economic growth that the U.S. saw in the first quarter of 2022, but largely believe that was due to one-off factors, such as swings in trade, and expect to see the U.S. return to growth in the second quarter.

More Hikes To Come

The minutes confirm the impression that the Fed will continue to raise rates aggressively until inflation eases. In fact, if inflation were to edge even higher the Fed appears inclined to act even more aggressively. Declines in financial markets are unlikely to change the Fed’s course, but major slippage in the job market might cause the Fed to reconsider. Although the markets might show some concern around the chance of a recession, as of three weeks ago, the Fed minutes suggest they view inflation as far more pressing concern.

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