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Fed signals caution on interest rates amid inflation concerns

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2024-02-22

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Federal Reserve officials have given U.S. investors, analysts, and politicians, heading for November’s elections, something to think about by making it clear they remain “highly attentive” to inflation risks and are therefore wary of cutting interest rates too quickly.

According to the minutes of the Fed’s January meeting, the conservative view on rate cuts pours more cold water on market expectations for an easing of monetary policy as soon as March and May.

The meeting was held before the weak and unexpected inflation data for consumer and producer prices, released last week, which showed cost pressures not easing as many investors thought they were.

Analysis of the minutes saw traders lift the US 10-year bond yield back over 4% to nearly 4.2%, while the dollar firmed slightly against the Aussie but eased against the yen and the euro.

The view put more pressure on weakening Wall Street prices ahead of the post-closing release of the much-awaited 4th quarter financial report from AI chip giant, Nvidia.

The discussion came as Fed policymakers not only decided to leave the Federal Funds Rate unchanged but also altered the post-meeting statement to indicate that no cuts would be coming until the rate-setting Federal Open Market Committee held “greater confidence” that inflation was receding.

“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 percent,” the minutes read. Fed officials noted that they wanted to see more before starting to ease policy, while saying that rate hikes are likely over.

“In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle,” the minutes said.

But that view was qualified with: “Participants generally noted that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.”

The January CPI and PPI data would not have given any greater confidence that inflation was easing towards 2 percent. Fed members said they will “carefully assess” incoming data to judge where inflation is heading over the longer term. Officials noted both upside and downside risks and worried about lowering rates too quickly.

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

Officials “remained concerned that elevated inflation continued to harm households, especially those with limited means to absorb higher prices,” the minutes said.

“While the inflation data had indicated significant disinflation in the second half of last year, participants observed that they would be carefully assessing incoming data in judging whether inflation was moving down sustainably toward 2 percent.”

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