Evening Brief – 02.21.24
Back to Reality
The FOMC minutes from the January 30-31 meeting echoed recent comments from several Fed officials, who have pushed back on the possibility of an interest rate cut in March, emphasizing a steady and patient approach.
The robust January economic data, which included nonfarm payrolls, CPI, and PPI, supported the Fed’s efforts to temper aggressive rate cut expectations.
Nonetheless, FOMC members remain cautious, concerned about the possible acceleration of inflation, the risks of cutting interest rates too soon, and the upside risk of easier financial conditions.
“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%,” according to the minutes.
In addition, “Several participants mentioned the risk that financial conditions were or could become less restrictive than appropriate, which could add undue momentum to aggregate demand and cause progress on inflation to stall.”
The probability of interest rate cuts have fallen since the last FOMC meeting, with March now off the agenda and total cuts in 2024 down from six to a coin flip between three and four.
And as rate-cut forecasts drop. U.S. Treasury rates climb, with the short end up more than 30 basis points, as the central bank clearly won the battle to return market expectations to the dot-plot projections.
Regarding concerns about inflation, the FOMC noted that “upside risks included easier financial conditions and stronger growth. Others cited were “possible disruptions to supply chains from geopolitical developments, a potential rebound in core goods prices as the effects of supply-side improvements dissipate, or the possibility that wage growth remains elevated.”
The staff outlook also garnered some attention, writing that the economic outlook was slightly stronger than the December projection, further progress on lowering inflation could take longer than expected, and risks to economic forecast are skewed to the downside.