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Fed Worried About Cutting Too Soon

At their late January meeting, Federal Reserve officials saw the potential negative consequences of cutting rates too soon as outweighing the risk of waiting too long – a balance of opinion that should help ratify market expectations for a hold at the March decision.

According to a record of the January 30-31 Federal Open Market Committee meeting, “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 sustainably down to 2 percent”.

Officials noted a series of risks to the inflation outlook, highlighting easier financial conditions, rebounding growth, and supply chain issues as potential threats to price stability, but seemed broadly content with the progress to date.

This echoes Jerome Powell’s messaging during the post-decision press conference, in which he called a March rate cut “unlikely” and said “we do have confidence, and it has been increasing, but we want to get greater confidence,” in the decline in inflation pressures. “What do we want to see? We want to see more good data. It’s not that we’re looking for better data… we’re looking at continuation of the good data that we’ve been seeing”.

Balance sheet mechanics were discussed, with a number of officials suggesting that “in-depth discussions” regarding a slowing in the pace of asset runoff should begin at the March meeting, with an “eventual” decision seemingly coming at a later date.

Markets are essentially unmoved, with the dollar holding steady and Treasury yields coming under modest upward pressure.

This likely reflects the fact that the minutes have been rendered somewhat obsolete in intervening weeks. Data released since the meeting has shown inflation rates and labour markets rebounding to the topside, seemingly defying the Fed’s efforts to slow aggregate demand. Rate cut expectations have been propelled out across the curve, and yields have snapped higher.

Volatility could resume after the closing bell later this afternoon when Nvidia releases its fourth quarter earnings and provides updated revenue projections.

The meeting record can be found here: https://www.federalreserve.gov/monetarypolicy/fomcminutes20240131.htm

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