Federal Reserve officials need to see more evidence that inflation is trending lower before they budge on interest rates, minutes from the central bank’s latest meeting showed on Wednesday. Policymakers don’t expect rates to go any higher this economic cycle, but they aren’t ready to cut.
That is particularly true after January’s inflation data—released after the Federal Open Market Committee’s Jan. 30-31 monetary policy meeting—was higher than expected and interrupted a trend of decelerating price growth in place for most of the past year.
“Participants judged that the policy rate was likely at its peak for this tightening cycle,” the minutes read. “Participants generally noted that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.”
Officials held the federal-funds rate target range steady at 5.25% to 5.50% at the meeting.
Fed officials also began thinking about thinking about a potential slowing of the pace of reductions to the central bank’s holdings of Treasury debt and mortgage-backed securities. The Fed is currently scaling back its balance sheet at the pace of $60 billion a month for Treasuries and $35 billion for mortgage-backed securities.
“Many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee’s next meeting to guide an eventual decision to slow the pace of runoff,” according to the minutes on Wednesday.
A potential slowing of the Fed’s balance sheet runoff won’t be linked to a decision on interest-rate decreases. The minutes state that a few officials noted that tapering could continue even after the FOMC began to reduce its fed-funds rate target.
(This is a developing story. Please check back soon for more detail and analysis. Below is a look at what what was expected before the minutes were made public.)
Minutes from the Federal Reserve’s latest meeting may shed light on policymakers’ thinking about cuts to interest rates, not to mention the economy and the central bank’s balance sheet. Investors will weigh the minutes against data showing inflation was higher than expected in January.
The minutes from the Federal Open Market Committee’s Jan. 30-31 monetary policy meeting will come out at 2 p.m. ET on Wednesday.
Officials held the federal-funds rate target range steady at 5.25% to 5.50% at the meeting, while signaling that—data permitting—the next move in interest rates would be down. Chairman Jerome Powell made it clear at his postmeeting press conference that more evidence that inflation really is moderating would be needed before rates can start to fall.
Investors responded by becoming more skeptical that rates would come down as quickly as they had expected. Later that day, interest-rate futures implied odds of about 35% for a reduction in borrowing costs at the Fed’s March meeting, compared with around 70% a month earlier.
“The lower inflation readings over the second half of last year are welcome,” Powell said. “But we will need to see continuing evidence to build confidence that inflation is moving down sustainably toward our goal.”
The minutes on Wednesday may provide some greater clarity about what will give Fed officials greater conviction that inflation is slowing sustainability, though they won’t go beyond general terms.
The Fed’s wait-and-see approach appeared prudent on Feb. 13, when the January consumer price index broke a series of declines in inflation that had continued for most of the past year. The core CPI, which excludes the volatile prices of food and energy, rose a higher-than-expected 0.4% last month to bring its 12-month gain to 3.9%—matching the December change. Producer inflation data on Friday similarly topped expectations.
That hotter inflation data has prompted traders to further pull back bets on near-term interest-rate cuts. Markets are now assigning slim chances of rate reductions at the Fed’s March and May meetings. June is the new consensus call for when the Fed’s cutting cycle will start.
Wednesday’s minutes will be outdated to a degree because they will offer a look at how Fed officials saw the economy before the January data. But they may still help frame how investors view government data on February inflation and employment that is due to be disclosed next month. Those reports will set the stage for the FOMC’s next meeting, scheduled for March 19-20.
The minutes could also include a summary of officials’ tentative plans for the Fed’s balance sheet. Powell hinted in his January press conference that conversations about slowing the pace of reductions to the central bank’s Treasury and mortgage-backed securities holdings had begun. The Fed is currently scaling back its balance sheet at the pace of $60 billion a month for Treasuries and $35 billion for mortgage-backed securities.
“I expect to see the broad strokes of where the committee is on that topic [in the minutes],” said Jake Schurmeier, a portfolio manager at Harbor Capital Advisors. “Then an announcement of their plans and principles at the March meeting and the start of tapering by the middle of the year. That pushes the rate-cut timeline to June at the earliest.”
Write to Nicholas Jasinski at [email protected]
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