The Federal Reserve of the United States (Fed) released the minutes of its January monetary policy meeting today. Most officials pointed out the “risk of excessive rate cuts” and planned to proceed cautiously with interest rate cuts. At the same time, officials also indicated that they are considering the appropriate time to start slowing down the balance sheet reduction.
According to CNBC and Reuters, most Fed officials at the meeting in late January “highlighted the risk of a too-easy policy stance and emphasized the importance of carefully assessing the data to judge if inflation rates will continue to decline to the 2% target,” and “participants emphasized the uncertainty about how long the restrictive policy stance needed to be maintained in order to return inflation to the 2% target.”
It is worth noting that only a few officials pointed out that “waiting too long for rate cuts” could pose downside risks to the economy, and they do not seem to be concerned about the potential negative impact of maintaining high interest rates. The minutes also mentioned that officials judged that interest rates may have peaked but that it is not yet time to lower them.
According to Bloomberg, Michelle Bowman, a usually more hawkish Fed governor, publicly stated on Wednesday that the current economic environment is not sufficient to warrant a rate cut. As for when a rate cut might be initiated, Bowman responded, “Certainly not now.”
Furthermore, in the previous month’s meeting, most officials expressed an optimistic and cautious stance on the prospects of lower inflation, believing that the risks of inflation rebounding have diminished. They stated that “rental prices declining, labor supply improving, and productivity increasing could all contribute to further slowing of inflation this year.” However, some officials also mentioned that the risks of higher inflation still exist, and they are “closely monitoring” the risk of inflation rebounding, noting that “momentum in overall demand might be stronger than currently assessed, particularly considering the remarkable resilience of consumer spending last year.”
Simultaneously, the minutes also indicated that Fed officials are considering starting to slow down the pace of balance sheet reduction. Balance sheet reduction is the second monetary tightening tool used by the Fed, in addition to rate hikes. The detailed operation involves the Fed reducing holdings of U.S. Treasury bonds, agency debt, and mortgage-backed securities (MBS) to shrink its balance sheet and withdraw the liquidity released into the market during the pandemic.
However, officials want to proceed cautiously with the timing of slowing down the balance sheet reduction, fearing potential disruptions to the financial markets. They decided to start a more in-depth discussion on the issue at the March meeting.
After the release of the January meeting minutes, the market’s reaction was relatively muted, with mixed fluctuations in U.S. stocks and a slight increase in the two-year Treasury yield.
The Dow Jones Industrial Average rose 48.44 points or 0.13%, closing at 38,612.24 points.
The NASDAQ fell 49.91 points or 0.32%, closing at 15,580.87 points.
The S&P 500 rose 6.29 points or 0.13%, closing at 4,981.80 points.
The Philadelphia Semiconductor Index fell 10.51 points or 0.24%, closing at 4,446.36 points.
The market’s expectations for the pace of rate cuts by the Fed this year have remained almost unchanged. The CME Group’s Fed Watch tool indicates that traders expect a slightly over 50% probability of the Fed initiating a rate cut of 25 basis points in June, and the number of rate cuts within 2024 has decreased from an initial estimate of 6 to the current 4. The Fed’s dot plot in December indicated that there would be 3 rate cuts this year.
As for Bitcoin, its price continued to fluctuate after hitting a daily low of $50,625 last night. It rebounded over 2.5% this morning, reaching a high of $51,950. As of the deadline, it was reported at $51,803.
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