At 3:00 Beijing time on Thursday, the Federal Reserve will release the minutes of its monetary policy meeting, which may reveal policymakers' thoughts on rate cuts, as well as their views on the economy and the central bank's balance sheet. Investors will "weigh" the minutes and the unexpected inflation data in January.
At the meeting, officials kept the target range for the federal funds rate unchanged at 5.25%-5.50%, while signaling that the next move in rates would be downward, data warranting.
Fed Chairman Jerome Powell made it clear in a press conference after the meeting that more evidence is needed that inflation is indeed slowing before interest rates begin to fall. Powell said:
"The lower inflation readings in the second half of last year are welcome, but we need to see sustained evidence to build confidence that inflation is declining towards our aim on a sustained basis."
The comments made investors more skeptical that interest rates would fall as quickly as they expected. Later in the day, interest rate futures showed about a 35% chance of a rate cut at the Fed's March meeting, compared with about a 70% chance a month ago.
Thursday’s minutes may shed more light on what has made Fed officials more confident that the slowdown in inflation is sustainable.
Some analysts expect the minutes may continue to show that Fed officials continue to oppose market bets on a quick rate cut.
Peter Tchir, head of macro strategy at Academy Securities, expects the Fed to re-emphasize its hawkish stance and insist that more progress on inflation is needed before officials are ready to cut rates. He said that while the minutes do reflect the content of the previous meeting, it is generally believed that the Fed can highlight certain discussions to convey policy messages. "The minutes are a policy tool in themselves, rather than simply reflecting the content of the meeting."
Are the minutes “outdated”?
After the Federal Reserve held its interest rate meeting, the January CPI data released on February 13 broke the trend of slowing inflation that had persisted for most of the past year, and the Federal Reserve's cautious wait-and-see attitude began to seem reasonable.
The core CPI, which excludes volatile food and energy prices, rose 0.4% last month, higher than expected, and the year-on-year increase reached 3.9%, the same as in December last year. The PPI data released last Friday also exceeded expectations.
The rising inflation data prompted traders to further withdraw their bets on a near-term rate cut. The market currently sees little chance of a rate cut at the Fed's March and May meetings. June is the new consensus for the Fed to start its "first rate cut".
Therefore, the minutes released early Thursday morning will be somewhat "outdated" because they will show Fed officials' views on the economy before the January data is released. But the data may still help shape how investors view February inflation and employment data scheduled for release next month and lay the foundation for the Fed's March interest rate meeting. Tchir said:
“I think we’re going to see a continued hawkish bias from the Fed to push back against a market that got ahead of itself on rate cuts. Now that we’ve seen CPI and PPI come on strong, the Fed will make sure to push back against those rate cut expectations in the minutes.”
The minutes may also include a summary of officials’ initial plans for the Fed’s balance sheet. Powell hinted at a January press conference that discussions had begun about slowing the pace of the Fed’s holdings of Treasurys and mortgage-backed securities. The Fed is currently shrinking its balance sheet at a rate of $60 billion a month for Treasurys and $35 billion a month for mortgage-backed securities.
"I would like to see in the minutes the general position of the committee on this issue," said Jake Schurmeier, portfolio manager at Harbor Capital Advisors. "Then announce their plans and principles at the March meeting and begin tapering QT in the middle of the year, pushing the timeline of rate cuts to June at the earliest."
The article is forwarded from: Jinshi Data