The prevailing tone in the minutes of the Federal Reserve meeting to be released next week is likely to be more hawkish, with members debating whether the current level of interest rates is sufficient.
"The minutes of the May Federal Open Market Committee (FOMC) meeting are likely to sound more hawkish on the sidelines than Chairman Powell's press conference", BofA said in a note on Friday.
At the May Federal Open Market Committee (FOMC) meeting, Fed members voted to keep rates unchanged and Powell, in the press conference following the decision, suggested that the next move is unlikely to be a rate hike.
"I think it's unlikely that the next rate policy move will be a hike. I would say it's unlikely",Powell said at the FOMC press conference on 1 May.
However, in the wake of concerns that disinflation might be stalling, other committee members were ‘more concerned about whether policy was being effective enough’, BofA added. ‘Therefore, the tone of the minutes may appear slightly tighter.’
But recent data - including April consumer inflation data showing a faster-than-expected deceleration in price pressures and April retail sales that came in weaker than expected - indicate that ‘the bar for hikes is high, although cuts are still a long way off’.
According to Investing.com's Fed Rate Monitor Tool, around 50% of traders expect the Fed to cut rates in September.
While signs of slowing inflation were welcome, services inflation remains too high, but that not only points to signs of ‘robust’ demand, says BofA, but also dispels some concerns that stagflation may be resurfacing.
‘We reject it [the stagflation narrative],’ BofA added, ‘we see signs that services inflation is being driven by robust demand.’
In the weeks following the April 30-May 1 meeting, Fed members have been adamant that rates will have to stay higher for longer to ensure inflation is on a sustainable path towards the 2% deceleration target, while others have not ruled out a possible hike.
Fed Governor Bowman said on Friday she would be willing to support a hike if disinflation stalled or reversed, adding that she was monitoring data to assess whether policy was tight enough.
"While the current stance of monetary policy appears to be at a restrictive level, I remain willing to raise the target range for the federal funds rate at a future meeting if incoming data indicate that progress in inflation has stalled or reversed", Bowman said.
However, others, while less vocal about the possibility of a hike, echoed the Fed's current wait-and-see approach to assessing whether the slowdown in inflation from the April report would continue in the coming months.
While acknowledging that the Fed has not yet reached its goal of bringing inflation down to 2 per cent, Atlanta Fed President Raphael Bostic said on Thursday that his current outlook is for a continued fall in inflation, which would make it appropriate to cut rates later in the year, but cautioned that nothing is locked in.
"I now think it will take longer to get to our 2 per cent target than I previously thought", the St. Louis Fed president said on Thursday, adding that incoming data will need to continue to be monitored.