The minutes of the Jan. 30-31 Federal Open Market Committee meeting showed policymakers remain attentive to the trajectory of inflation, with some worried that progress toward the central bank’s 2% target could stall. Together, the record reinforced the Fed’s preference for more evidence that inflation is firmly on a downward path.

Fed officials agreed borrowing costs were likely at their peak, but the exact timing of the first interest-rate cut remained unclear.

“Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2%,” according to the meeting minutes released Wednesday.

Only a “couple” of officials pointed to risks to the economy from waiting too long to cut.

“Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained,” the minutes showed.

Follow the reaction in real time on Bloomberg’s TOPLive blog

Economic data has largely surprised to the upside since the central bank’s last gathering, disrupting the rapid slowing in inflation seen at the end of 2023 and validating the Fed’s cautious approach.

Payrolls Jump

US employers boosted payrolls by the most in a year, and the consumer price index rose by more than expected across the board. Economists forecast the Fed’s preferred gauge of underlying inflation to rise at the fastest pace since early 2023 when it’s released next week.

Markets have significantly dialed back expectations for early and rapid rate cuts as a result, with traders in the federal funds futures market now betting the Fed will first lower rates in June. Investors also expect three to four cuts in 2024, a pace more in line with policymakers’ median projection in December.

Fed officials will update their projections for rates and the economy at their March 19-20 meeting. Ahead of that gathering, Fed Chair Jerome Powell will have an opportunity to offer fresh thoughts on the outlook when he testifies before Congress in early March.

Policymakers voted unanimously to leave interest rates unchanged in a range of 5.25% to 5.5% last month while revamping their post-meeting statement. The central bank dropped a reference to potential additional policy “firming” and instead indicated it wouldn’t be appropriate to reduce rates without “greater confidence” about the trajectory of inflation.

Powell said earlier this month that it was unlikely policymakers would reach that level of confidence by the central bank’s March meeting.

Balance Sheet

The minutes indicated some officials said it may be appropriate to start slowing the pace of the balance sheet runoff, a process known as quantitative tightening.

Against a backdrop of declining balances held at the Fed’s overnight reverse repo facility – a key liquidity tool for markets, many participants suggested the committee should have an in-depth discussion about the balance sheet at the March meeting, which would guide an “eventual decision” on slowing the pace of runoff.

“Some participants remarked that, given the uncertainty surrounding estimates of the ample level of reserves, slowing the pace of runoff could help smooth the transition to that level of reserves or could allow the committee to continue balance sheet runoff for longer,” the minutes showed.

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Published: 22 Feb 2024, 12:53 AM IST