Fed minutes show fears of cutting rates too quickly

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Most Federal Reserve officials last month flagged concerns over moving too quickly to cut interest rates, indicating such risks outweighed keeping borrowing costs elevated for too long.

The minutes of the Jan. 30-31 Federal Open Market Committee meeting showed policymakers remain attentive to the trajectory of inflation, with some worried that progress toward the central bank’s 2 per cent target could stall. Together, the record reinforced the Fed’s preference for more evidence that inflation is firmly on a downward path.

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Fed officials agreed borrowing costs were likely at their peak, but the exact timing of the first interest-rate cut remained unclear. That said, the minutes indicated growing support among a group of policymakers for slowing the pace at which the Fed shrinks its asset portfolio.

“Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 per cent,” according to the meeting minutes released Wednesday.

Only a “couple” of officials pointed to risks to the economy from waiting too long to cut.

“Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained,” the minutes showed.

Treasuries remained lower and the S&P 500 held losses on the day.

Economic data has largely surprised to the upside since the central bank’s last gathering, disrupting the rapid slowing in inflation seen at the end of 2023 and validating the Fed’s cautious approach.

Payrolls Jump

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U.S. employers boosted payrolls by the most in a year, and the consumer price index rose by more than expected across the board. Economists forecast the Fed’s preferred gauge of underlying inflation to rise at the fastest pace since early 2023 when it’s released next week.

Markets have significantly dialled back expectations for early and rapid rate cuts as a result, with traders in the federal funds futures market now betting the Fed will first lower rates in June. Investors also expect three to four cuts in 2024, a pace more in line with policymakers’ median projection in December.

Fed officials will update their projections for rates and the economy at their March 19-20 meeting. Ahead of that gathering, Fed Chair Jerome Powell will have an opportunity to offer fresh thoughts on the outlook when he testifies before Congress in early March.

Policymakers voted unanimously to leave interest rates unchanged in a range of 5.25 per cent to 5.5 per cent last month while revamping their post-meeting statement. The central bank dropped a reference to potential additional policy “firming” and instead indicated it wouldn’t be appropriate to reduce rates without “greater confidence” about the trajectory of inflation.

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Powell said earlier this month that it was unlikely policymakers would reach that level of confidence by the central bank’s March meeting. And earlier Wednesday, Fed Governor Michelle Bowman said the time to cut interest rates was “certainly not now.”

Balance Sheet

The minutes indicated some officials said it may be appropriate to start slowing the pace at which it shrinks its asset portfolio, a process known as quantitative tightening.

Against a backdrop of declining balances held at the Fed’s overnight reverse repo facility – a key liquidity tool for markets, many participants suggested the committee should have an in-depth discussion about the balance sheet at the March meeting, which would guide an “eventual decision” on slowing the pace of runoff.

“Some participants remarked that, given the uncertainty surrounding estimates of the ample level of reserves, slowing the pace of runoff could help smooth the transition to that level of reserves or could allow the committee to continue balance sheet runoff for longer,” the minutes showed.

With assistance from Chris Middleton and Scott Lanman.

Bloomberg.com

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