EconoFACTS

February 21, 2024 | 15:32

January FOMC Minutes... Fear of Cutting Too Quickly

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

The Minutes from the January FOMC meeting were closely aligned with our pre-conceived expectations, and reinforce our baseline forecast for a mid-year start to the rate cutting cycle at the earliest this year. Right now, the June or July FOMC meetings appear to be the most likely candidates for the first quarter-point rate cut. The minutes clearly illustrate that most Fed officials remain concerned about moving too quickly to cut interest rates: it was noted that the risks of moving too quickly to cut outweigh the risks of keeping borrowing costs elevated for too long. Some officials noted progress on inflation could stall. In contrast, only a couple of officials pointed to risks to the economy from waiting too long. The economic forecast prepared by the staff for the January meeting was slightly stronger than the December projections. In general, officials said they remained “highly attentive” to inflation risks and noted they did not see it as appropriate to lower rates until gaining “greater confidence” inflation is moving sustainably toward 2%. Officials highlighted the uncertainty in the economic and inflation outlook, as well as uncertainty over how long a restrictive policy stance would be needed.

No detailed plans were mentioned for the winding down of the Fed’s quantitative tightening program. However, acknowledging reductions in the overnight reverse repo usage, many officials said it would be appropriate to start in depth balance sheet discussions at the next meeting. A few officials noted balance sheet runoff could continue after rate cuts begin, while some policymakers said a slowing pace of runoff could help smooth the transition to an ample level of reserves and allow the runoff to continue for longer. The staff noted that once the ON RRP facility is either depleted or stabilized at a low level, reserves will decline at a pace comparable with the runoff of the Fed’s securities portfolio.

In terms of risks around the outlook, Fed staff placed “some weight” on the chance that further progress on inflation could take longer than expected, while characterizing U.S. financial system vulnerabilities as notable, and saw risks on the economic forecast skewed to the downside.

Bottom Line: The minutes were not much of a market mover today with probabilities of a March or May rate cut holding near recently low levels, and bets still being placed on June or July for the first reduction. The market is pricing in about 3 and a half quarter-point rate cuts before the end of this year. U.S. stocks were trading modestly lower in the wake of the minutes release. Treasury yields rose, mostly holding onto increases seen earlier in the day.