The U.S. Federal Reserve’s Federal Open Market Committee released the minutes of its January 30-31 meeting on February 21.
The minutes reflect the Fed’s view of the U.S. economy. In this case, the reserve bank needed to update its view based on the latest CPI report, which came in showing an economy that is slightly hotter than expected. The market had been looking for news that would signal interest rate cuts sooner rather than later in 2024, but the CPI data effectively put an end to hopes of a cut before the summer.
As the Fed put it:
Financial conditions eased modestly but remained about as tight as they were last summer and much tighter than when the hiking cycle began. Over the intermeeting period, declines in nominal Treasury yields were concentrated at the front end of the yield curve. Staff models suggested that the declines in shorter-term yields were
mostly attributable to a lower expected policy rate path and were concentrated in expected real rates, while expected inflation was little changed. Pricing of inflation
derivatives continued to suggest a near-term path of inflation consistent with a return to 2 percent later this year.
And finally, the committee decided to:
Undertake open market operations as necessary to maintain the federal funds rate in a target range of 5¼ to 5½ percent.
• Conduct standing overnight repurchase agreement operations with a minimum bid
rate of 5.5 percent and with an aggregate operation limit of $500 billion.
• Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counter party limit of $160 billion per day
Other notes
The Fed noted conditions outside of the U.S. as having their own headwinds. The participants pointed to the continuing recovery from the fuel price shock in Europe last winter, though the report did not take into account a mild winter in southern Europe this year. The real estate sector in China as well as lower consumer confidence also gained the committee’s attention.
Downside risk
The committee pointed to its concern that overly stubburn inflation could become a problem. From the committee:
“The risks around the forecast for real activity were viewed as skewed to the downside, as any substan tial setback in reducing inflation might lead to a tighten ing of financial conditions that would slow the pace of real activity by more than the staff anticipated in their baseline forecast. In addition, the possibility of a larger than-expected erosion of households’ financial positions was seen as a downside risk to the projection for real activity.”
