Fed Minutes: Cutting Rates Too Quickly Appears Unlikely As Inflation Risks Are Still Around
Recently, Wall Street began to grow concerned over news of the Federal Reserve potentially restarting rate hikes. News like this caught many off guard, since the Fed will start cutting rates this year has always been the market consensus.
However, the minutes of the Fed meeting disclosed last night indicate that Wall Street's sudden worry is not unwarranted.
The latest documents show that most Fed officials are still looking for convincing evidence to prove that inflation is indeed returning to the established target of 2%. Almost all current economic data seems to prove that for the Fed, cutting rates too quickly is not the preferred option.
Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained, the minutes state.
Most of the voting members pointed out the risk of adjusting policy too quickly and emphasized the importance of carefully evaluating new data when determining whether inflation continues to fall to 2%.
The minutes show that, overall, central bank officials believe that the current monetary policy has made great progress in combating inflation - as the labor market continues to improve and wage growth slows, core inflation levels excluding housing will further decline.
However, they also point out that the current level of inflation is still far above the target, so they need to be more cautious in judging whether inflation is persistently falling to 2%. Some officials also mentioned that relaxing some previous restrictions at this time may stall the process of suppressing inflation.
Earlier, Susan Collins, Chairman of the Boston Fed, and new voting member Loretta Mester, who also serves as Chairman of the Cleveland Fed, forecasted rate cuts to likely occur later this year. Meanwhile, Raphael Bostic, President of the Atlanta Fed, directly set the timetable for summer time, which possibly indicates the third quarter of this year.
The latest evidence to support this view appeared last Friday when the Producer Price Index (PPI) data released by the US Department of Labor exceeded market expectations. Moreover, the Consumer Price Index in January was higher than economists expected.
In response to this, Tom Barkin, the President of the Richmond Fed who also gained voting rights this year, commented on Wednesday, stating that the new price report will make things harder.
All these kinds of data and speeches have not only completely ruled out the possibility of a Fed rate cut in March, but also shaken confidence in a first rate cut in June. This has directly triggered a new round of selling frenzy for the US debt.
Data shows that on Wednesday local time, the 10-year US Treasury yield surged to 4.324%, returning to its highest level since the end of November last year. At the same time, the option contracts betting that the 10-year Treasury yield will break through 4.5% also began to welcome a large number of traders. The last time this benchmark bond yield reached this level was in November last year. The 2-year and 5-year US Treasury yields also surged on the day.
These scenarios suggest that a large amount of US Treasury prices have fallen. However, the market believes a larger sell-off wave is yet to come.
In addition, the minutes of this meeting indicate that the Fed will have a more in-depth discussion on the balance sheet reduction at its March meeting, especially on how much reserve level can meet the current demand of the banks.
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 stated.
In addition, a few participants noted that the process of balance sheet runoff could continue for some time even after the Committee begins to reduce the target range for the federal funds rate.