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Financial Bulletin

Minutes of the Fed meeting: Officials are worried about cutting interest rates too quickly and that inflation will stagnate.

Release Time:2024-02-22

According to the minutes of the meeting, at the Federal Reserve's monetary policy meeting at the end of last month, Fed policymakers generally thought that the current policy interest rate may have reached the peak of this week's interest rate hike cycle, acknowledging that the risk of inflation continuing to rise is reduced, but they are wary of future interest rate cuts, emphasizing that they are not sure how long they will raise interest rates. Most Fed officials also mentioned the risk of cutting interest rates too fast.


The Fed's interest rate meeting at the end of January continued to keep high interest rates unchanged. After the meeting, the resolution statement deleted the wording suggesting further interest rate hikes in the future and opened the door to interest rate cuts, but hinted that it would not act soon, saying that the Fed expected that it was not suitable to cut interest rates until it had more confidence in reducing inflation to the target. After the release of the meeting, Federal Reserve Chairman Powell said that the Federal Reserve is open to interest rate cuts, but it is not in a hurry to act and does not think it is possible to cut interest rates in March. The minutes of this meeting did not release the signal that the Fed intends to cut interest rates soon.


After the minutes were released, Nick Timiraos, a journalist known as the "New Fed News Agency", wrote that at last month's meeting, most Fed officials hinted that the premature interest rate cut and price pressure became entrenched, rather than the excessive interest rate remained for too long. Only two officials emphasized the risk of maintaining high interest rates for a long time.


Policy interest rate may be at its peak, and it is not suitable to cut interest rates before inflation is more confident.


According to the minutes of the meeting released on Wednesday, February 21st, EDT, in terms of interest rate prospects, Fed officials attending the meeting in January thought that "the policy interest rate may be at the peak of this tightening cycle", while in the last meeting in December last year, "participants thought that the policy interest rate may be at or near the peak of this tightening cycle".


Participants pointed out that the decline in inflation in 2023 and more and more signs that the supply and demand of products and labor markets tend to be balanced all prove that interest rates may be at the peak. Like the statement of the meeting, the minutes mentioned that the Fed officials attending the meeting "generally pointed out that they did not think it appropriate to reduce the target range of the federal funds rate until they were more confident that inflation would continue to move towards 2%".


Many participants said that the FOMC's past policy actions and the continuous improvement of the supply environment are working together to make the supply and demand more balanced. Participants pointed out that the future trend of policy interest rate will depend on the upcoming data, changing prospects and risk balance. Several participants emphasized the importance of continuing to communicate clearly about how to rely on data.


Most officials stressed the importance of evaluating data to judge inflation, and the two pointed out that long-term austerity would bring downside risks to the economy.


In terms of risk management, the minutes stated that the participants indicated that the risks of achieving full employment and reducing inflation are tending to be better balanced, "but they are still highly concerned about inflation risks". In particular, they believe that the upward risk of inflation has weakened, but inflation is still higher than FOMC's long-term goal of 2%.


Wall Street has noticed that the minutes of the December meeting mentioned that A number of participants stressed that there is uncertainty about how long the restrictive monetary policy stance will last, and pointed out that excessively restrictive stance may bring downside risks to the economy. The minutes of January also mentioned these two issues, and added the risk of cutting interest rates too quickly. The minutes wrote:


"some participants pointed out that the progress of price stability may stagnate, especially if the total demand increases or the supply-side recovery is slower than expected. Participants emphasized the uncertainty of how long the restrictive monetary policy stance needs to be maintained.


Most participants pointed out the risk of relaxing policy stance too quickly, and stressed the importance of judging whether inflation can be reduced to 2% sustainably by carefully evaluating future data. However, two (a couple of) participants pointed out that maintaining an excessively restrictive position for a long time will bring downside risks to the economy. "


It is suggested that the next meeting should discuss in depth that slowing down the balance sheet contraction may be helpful for the transition to an adequate reserve level.


In terms of reducing the balance sheet, the minutes write that the Fed officials attending the meeting pointed out that the ongoing process of reducing the balance sheet is an important part of FOMC's method of achieving macroeconomic goals, and the reduction of the balance sheet has progressed smoothly so far.


In view of the decreasing use of the overnight reverse repo (ON RRP) tool by market participants, many officials attending the meeting thought it was appropriate to start in-depth discussion on the balance sheet at the next FOMC meeting, so as to guide the final decision to slow down the reduction of the balance sheet.


Some participants said that, considering the uncertainty about which level belongs to the ample level of reserves, slowing down the contraction may help to make a smooth transition to the ample level of reserves, or the contraction may last longer. In addition, some (a few) participants pointed out that even after FOMC began to cut interest rates, the table shrinkage may continue for some time.


Financial environment risk and geopolitical risk


As for the financial environment, when discussing the uncertainty of economic prospects, several participants mentioned the risk that the financial environment has become or may become unsuitable, and this risk of insufficient restrictions may unnecessarily strengthen aggregate demand and lead to the stagnation of inflation.


Participants also mentioned geopolitical risks. For example, among the downside risks of inflation and economic activities, there are geopolitical risks that may lead to a sharp drop in demand, negative spillover effects that may be caused by the slowdown of growth in some foreign economies, risks that the financial environment may remain restrictive for a long time, or weak household balance sheets may lead to faster and slower consumption than expected.


Staff believe that asset valuation is higher than the fundamentals, and commercial real estate prices have not fully reflected the weaker fundamentals.


The minutes show that the staff of the Federal Reserve are somewhat worried about the financial situation when assessing the financial situation.


According to the minutes, the staff believe that the pressure of asset valuation is still significant, because the valuation of a series of markets is higher than the fundamentals. Although the underwriting standard is still strict, the house price has risen to the upper limit of the historical range relative to the rent and the yield of government bonds.


The staff pointed out that the price of commercial real estate continued to fall, especially in the multi-family residential and office areas. The low transaction level in the office area may indicate that the price has not fully reflected the weaker fundamentals of the industry.


Risk warning and exemption clause

The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.

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