USD: Fed Minutes: Caution on Rapid Rate Cuts at Last Meeting
FED meeting minutes outcome is Delaying rate cuts is necessary for current situation. Inflation target of 2.0% must be achieved, May be second half of 2024 have the chances of rate cut opportunities if inflation driven lowered.
Fed Officials at Last Meeting: No Rush to Cut Rates, Optimism Balanced with Caution on Inflation
During their recent meeting, Federal Reserve officials expressed a cautious approach to lowering interest rates, emphasizing the need for greater confidence in inflation receding before considering cuts. Despite optimism about the success of policy moves in lowering inflation rates, officials wanted more evidence before easing policy, stating that rate hikes are likely. The meeting summary highlighted a peak in the policy rate for the tightening cycle but suggested a reluctance to reduce the target range for the federal funds rate until there is increased confidence in sustainable movement towards the 2 percent inflation target. The committee acknowledged progress in inflation but viewed some of it as “idiosyncratic” and possibly temporary. Members committed to carefully assessing incoming data to determine the longer-term inflation trajectory, citing both upside and downside risks and concerns about a premature rate cut.
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Participants expressed uncertainty about the duration of maintaining a restrictive monetary policy stance, citing concerns about the prolonged impact of elevated inflation on households, especially those with limited means. Despite signs of disinflation in the second half of the previous year, there was a consensus among participants to carefully assess incoming data to judge the sustainability of inflation moving toward the 2 percent target.
The minutes revealed an internal debate on the pace of the Fed’s future moves, considering the uncertain economic outlook. Recent readings on consumer and producer prices, since the January meeting, indicated higher-than-expected inflation, persisting above the Fed’s 2% 12-month target.
In the weeks following the meeting, several officials have advocated for a patient approach to monetary policy loosening. The stable economy, with a 2.5% annualized growth rate in 2023, has reassured FOMC members that the series of 11 interest rate hikes in 2022 and 2023 did not significantly hinder growth. The robust expansion of the U.S. labor market, adding 353,000 nonfarm payroll positions in January, and first-quarter economic data pointing to a 2.9% GDP growth, according to the Atlanta Fed, further supported this perspective.
In addition to rate discussions, members also addressed the Fed’s balance sheet, noting that since June 2022, the central bank allowed over $1.3 trillion in Treasurys and mortgage-backed securities to roll off without reinvesting proceeds as usual.
The minutes hinted at a more in-depth discussion on the “ample level of reserves” at the upcoming March meeting. Policymakers from the January meeting signaled a cautious approach to “quantitative tightening,” with questions arising about the optimal reserve holdings for banks, currently deemed “ample.” Some participants suggested slowing the pace of runoff to ease the transition or prolong the balance sheet runoff.
With Fed officials viewing current policy as restrictive, the key consideration is how much it needs to be relaxed to support growth and manage inflation. Despite concerns about potentially excessive growth, the consumer price index rose 3.1% on a 12-month basis in January, with the sticky CPI, emphasizing stable prices, increasing by 4.6%. Producer prices exceeded Wall Street expectations with a 0.3% monthly increase.
Chair Jerome Powell, in a post-FOMC meeting interview on “60 Minutes,” emphasized a careful approach to reducing interest rates, citing the need for more evidence of sustainable inflation decline to 2% with a strong economy.
Market expectations for rate cuts have shifted, with the anticipated March cut now pushed to June. The expected total cuts for the year have been revised to four from six, compared to the FOMC’s December projection of three.
USD: USD Recovers on Fed Minutes Warning about Early Rate Cuts
FED meeting minutes outcome is Delaying rate cuts is necessary for current situation. Inflation target of 2.0% must be achieved, May be second half of 2024 have the chances of rate cut opportunities if inflation driven lowered.
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Policymakers are hesitant to cut interest rates until there’s stronger evidence of sustainable movement towards the 2.0% inflation target, indicating a potential delay in the easing cycle. Postponing interest adjustments by the Federal Reserve might lead to a near-term increase in U.S. bond yields, boosting the U.S. dollar and potentially pushing the DXY index to new yearly highs by March.
USD: Fed Minutes: Caution on Rapid Rate Cuts
FED meeting minutes outcome is Delaying rate cuts is necessary for current situation. Inflation target of 2.0% must be achieved, May be second half of 2024 have the chances of rate cut opportunities if inflation driven lowered.
In the previous month, a majority of Federal Reserve officials expressed concerns about the potential risks associated with a rapid move to cut interest rates, prioritizing these concerns over keeping borrowing costs elevated for an extended period. The minutes from the Jan. 30-31 Federal Open Market Committee meeting highlighted the policymakers’ continued focus on inflation trajectory, with worries that progress toward the central bank’s 2% target might stagnate, reinforcing the Fed’s preference for more evidence of a sustained downward path in inflation.
While Fed officials acknowledged that borrowing costs were likely at their peak, the exact timing of the first interest-rate cut remained uncertain. The minutes emphasized the risks of moving too quickly to ease policy and underlined the importance of carefully assessing incoming data regarding inflation before making any decisions.
Only a “couple” of officials pointed to risks associated with waiting too long to cut rates, highlighting the uncertainty about the duration of maintaining a restrictive monetary policy stance.
Recent economic data has surprised on the upside since the last meeting, disrupting the rapid slowing in inflation observed at the end of 2023 and validating the Fed’s cautious approach. Payrolls saw a significant boost, and the consumer price index rose more than expected, leading to a revision in market expectations for early and rapid rate cuts. Traders in the federal funds futures market now anticipate the Fed’s first rate cut in June, with expectations of three to four cuts in 2024.
The upcoming March 19-20 meeting will see Fed officials updating their projections for rates and the economy. Fed Chair Jerome Powell is expected to offer fresh insights on the outlook when testifying before Congress in early March. The unanimous decision to leave interest rates unchanged last month was accompanied by a revamped post-meeting statement, emphasizing the need for “greater confidence” about the inflation trajectory before considering rate reductions.
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The minutes also indicated that some officials considered it appropriate to start slowing the pace of the balance sheet runoff, known as quantitative tightening. Amid declining balances at the Fed’s overnight reverse repo facility, participants suggested an in-depth discussion about the balance sheet at the March meeting to guide an “eventual decision” on slowing the pace of runoff.
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