Market Wire: Outdated Fed Minutes Point to Slower Pace of Tightening Ahead

“Almost all” officials on the Federal Reserve’s policy committee agreed to raise rates by a quarter percentage point at their early-February meeting, with a very small number supporting a more aggressive move - suggesting that the world’s most powerful central bank is now relatively committed to a more gradual tightening trajectory.

Both Cleveland’s Loretta Mester and St. Louis’ Jim Bullard have publicly suggested that they lobbied for a half percentage-point move at the meeting, and a record of the group’s January 31- February 1 meeting published this afternoon seems to suggest they were largely alone: according to the minutes, only a “few” participants argued “that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance”.

Officials warned of the danger that an “insufficiently restrictive” setting could pose to the central bank’s inflation fight, and clearly telegraphed the desire to hold rates at elevated levels for a prolonged period of time, noting “Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time”.

Economic growth was seen remaining relatively subdued, and inflation fears seemed to subside somewhat, with staff forecasts looking for “steep declines in consumer energy prices and a substantial moderation in food price inflation” this year. By 2025, “both total and core PCE (Personal Consumption Expenditure) price inflation were expected to be near 2 percent”.

Terminal rate expectations fell very slightly after the release, with markets still expecting the central bank to deliver a quarter-percentage-point rate hike at its March meeting, followed by one—and possibly two—more in the coming months. The dollar inched lower, while equities, commodities, and risk-sensitive currencies climbed.

But objects in mirror are farther than they appear: today’s minutes have been rendered somewhat obsolete in intervening weeks. Data released since February 1 has shown inflation rates remaining stubbornly high while job creation, industrial production, and retail sales remain firmly in expansionary territory, apparently defying the Fed’s efforts to slow aggregate demand. Yield curves have moved up sharply, helping mitigate concerns about a loosening in financial conditions. 

And more data will land before the next meeting: January’s personal income and expenditures numbers will be released before the central bank convenes on March 21 and 22, along with February’s non-farm payroll, consumer price, and retail sales reports. If the “bullwhip effects” that have dominated global economic activity since the pandemic continue to play out, the story is vulnerable to more reversals.