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More signs inflation is slowing before pivot to cuts as upside risks emerge: Fed

Published 02/21/2024, 02:05 PM
Updated 02/21/2024, 02:39 PM
© Reuters – Federal Reserve policymakers signaled no urgency to pivot to rate cuts as further confidence was needed to ensure that inflation continues slowing toward target just as concerns of "upside risks" emerge, according to the minutes of the Federal Reserve’s Jan.30-31 meeting released Wednesday.           

"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," the minutes showed.

At the conclusion of its previous meeting on Jan. 31, the Federal Open Market Committee, or FOMC, kept its benchmark rate in a range of 5.25% to 5.5%.

In what was the fifth-straight meeting that the FOMC had decided to stand pat on rates, the central bank also underlined its less hawkish bias by acknowledging that "the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle," the minutes showed.

Since the meeting, however, incoming economic data including upside surprises in recent inflation and labor market data have suggested that putting out the lingering embers of inflation could prove more challenging and the road to a ‘soft landing’ may be bumpier than many had expected.

The consumer price index for January slowed to a 3.1% pace on an annualized basis from 3.4% in the prior month, though that was less than expectations for 2.9%. While core CPI, which strips out the volatile food and energy and is considered a more accurate gauge of inflation, remained at a 3.9% pace in January, missing economists’ forecast of 3.7%.

The strong data appear to have filtered into the Fed's thinking as voting fed members highlighted "upside risk" to both inflation and economic activity, indicating that momentum in economic growth may likely be "stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year."

Fed staff, meanwhile, believed "risks around the inflation forecast were tilted slightly to the upside ... and placed some weight on the possibility that further progress in reducing inflation could take longer than expected."

Adding to the growth-led inflation worries, an easing in financial conditions, the minutes noted, could cause "progress on inflation to stall."

The signs of life in recent inflation data forced investors to rein in their dovish expectations for rate cuts this year, with just four cuts now expected in 2024 rather than the six, or seven priced-in a few months ago. That, however, is still above the Fed’s projections, released in December, calling for just three rate cuts this year.

But even as Fed members expressed "uncertainty" about how long rates would need to remain higher for longer, the Fed's bias toward a restrictive policy stance is easing. The central bank now sees the need to begin discussions about eventually slowing the pace of its balance sheet reduction, or quantitative tightening, program.    

"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," the minutes added.

The Fed has cut the size of its balance sheet to about $7.5 trillion from just over $9 trillion since starting its QT plan in June 2022 by allowing Treasury and mortgage-backed securities to mature rather than reinvest them. 

Latest comments

War = Inflation. Biden likes war
No.  Inflation frequently happens w/out war.
wow tyrone, you're a genius.. tell us more....
The fed knows the Biden likes WAR- the 80billion a month th Ukraine and 80 billion to Israel CREATES INFLATION. War =inflation. Us consumers are totally done.
Better ask God to wise up))
Not standing up to aggressors now leads to more inflation later.
Tell the government to stop it’s excessive spending and borrowing. Doing so would reduce inflation, through reduced demand, and eliminate the need to raise interest rates and harm borrowers, including homeowners.
Shutting down the gov't then paying gov't employees back-pay for time not worked and overtime pay to catch up w/ work increases inflation.
If they actually lower rates it would be like setting a brush fire and inflation/ assets would surge and they have to raise rates again. Remember the 80's.
I entirely agree. Many measures show inflation is stuck and even growing by some measures. Analysts with pick the few that favor their position.
it's time someone asks the fed why it does not reduce 160 B / month its balance sheet, as promised since July 23
Can you provide source for this $160 b/month promise?
I don't know about such a promise, but the Fed has reduced it balance sheet by $700 billion since July 23.
obsessed with rates cuts, desperation from an irrealistic valued stock market... FED must deliver what it promised to reduce balance sheet. it should be 1T lower by now...
It is $1.4 T lower.
Title correction: "Investors wait to see what stock Nancy Pelosi buys next now that NVDA pump and dump complete"
Nothing we didnt already know
Yup ... it's the minutes of a 3-week old FOMC meeting market already knows about.
I wish the markets would quit this "sky is falling" reaction to the FOMC decisions to stand pat on interest rates. They do the same thing with fully-expected news when that news is less than wonderful.
  People I know and I were never "tapped out".  And how does "beyond tapped out" works?  If "beyond", that means it was never "tapped out".
My reference to tapped out, was that the market had surpassed valuations(tech in particular) to offer reasonable pricing. A little downtrend would provide the opportunity to buy in again and ultimately take more profits. Bubble control.
  "Tapped out" means to run out of money.  Doesn't have anything to do w/ valuation.
They shall go to 5.75%!
The parabolic downturn doesn't need to hit that hard. No need to.
misleading headline
What's misleading?
Inflation still very high and only going up. It really depends how you look at it.
Inflation is medium.
Inflation still very high and only going up. It really depends how you look at it.
Markets will bhooommmm
There could well be a second wave of inflation. If so, cutting now would be a disaster. Economy is very resilient. No harm to wait. Simple risk/benefit analysis.
June 2025
What do you mean?
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