The Federal Reserve of the United States (Fed) released the minutes of its monetary policy meeting in January today. Most officials pointed out the “risks of excessive rate cuts” and planned to proceed cautiously with interest rate cuts. At the same time, officials also indicated that they are considering the appropriate timing to slow down the pace of asset tapering.
According to CNBC and Reuters, most Fed officials at the January meeting “highlighted the risks of a too accommodative policy stance and emphasized the importance of carefully assessing data to determine whether inflation rates continue to decline to the 2% target,” and “participants underscored the uncertainty about the length of time that a restrictive monetary policy stance would need to be maintained in order to return inflation to the Committee’s 2 percent objective.”
It is worth noting that only a few officials mentioned that “waiting too long for rate cuts” could pose downside risks to the economy, seemingly not concerned about the potential impact of maintaining high interest rates. The minutes also stated that officials judged that interest rates may have peaked, but now is not the time for rate cuts.
According to Bloomberg, Michelle Bowman, a traditionally more hawkish Fed governor, publicly stated on Wednesday that the current economic environment is not sufficient to warrant a rate cut. As for when rate cuts might be initiated, Bowman responded, “Certainly not now.”
Furthermore, in the previous month’s meeting, most officials expressed an optimistic and cautious stance on the prospects of lower inflation, believing that the risks of inflation rebounding have diminished. They stated that “rental prices declining, improved labor supply, and productivity improvements could all contribute to further slowing of inflation this year.” However, some officials also pointed out that the risks of inflation rising remain, and they are still “closely monitoring” the risk of inflation rebounding. “Participants noted that the momentum of overall demand might be stronger than currently assessed, particularly considering the remarkable resilience of consumer spending last year.”
Meanwhile, the minutes also indicated that Fed officials are considering the timing to start slowing down the pace of asset tapering. Tapering is the second monetary tightening tool employed by the Fed, in addition to raising interest rates. The detailed operation involves the Fed reducing holdings of U.S. Treasury bonds, agency debt, and mortgage-backed securities (MBS) to shrink its balance sheet and retrieve the excess liquidity released into the market during the pandemic.
However, officials want to proceed cautiously with the timing of tapering, fearing that it may disrupt the financial markets. They decided to have an in-depth discussion on tapering at the March meeting.
After the release of the minutes of the January meeting, the market reaction was relatively subdued, with mixed movements in U.S. stocks and a slight increase in the two-year Treasury bond yield.
The Dow Jones rose 48.44 points or 0.13%, closing at 38,612.24 points.
The NASDAQ fell 49.91 points or 0.32%, closing at 15,580.87 points.
The S&P 500 rose 6.29 points or 0.13%, closing at 4,981.80 points.
The Philadelphia Semiconductor Index fell 10.51 points or 0.24%, closing at 4,446.36 points.
Market expectations for the pace of rate cuts by the Fed this year have hardly changed. The CME FedWatch tool shows that traders expect the Fed to start the first rate cut of 25 basis points in June, with a probability slightly over half (50.7%). The number of rate cuts expected within 2024 has decreased from 6 times at the beginning of the year to the current 4 times. The Fed’s dot plot in December indicated that there would be 3 rate cuts this year.
As for Bitcoin, its price continued to fluctuate after hitting a daily low of $50,625 last night, and rebounded more than 2.5% this morning. It reached a high of $51,950 and was trading at $51,803 at the time of writing.
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Historical lesson! If the US Federal Reserve initiates “massive monetary easing,” the stock market usually plummets.