Fed Minutes: A bit "dovish" But the most critical questions are left blank

Finance Associated Press, January 4 (edited by Shi Zhengcheng) In the early morning of Thursday, Beijing time, the Federal Reserve released the minutes of its December interest rate meeting as scheduled. What happened at last month's post-meeting press conference was uncharacteristically a talk about cutting interest rates, so what happened at that meeting has been a bit of a concern.

(Source: Federal Reserve)

In summary, the well-compiled minutes do show the Fed's gradual shift to rate cuts, but the wording in this material alone is unlikely to support the market's eagerness to expect a 150 basis point rate cut in 2024.

About interest rate cuts: Powell's words are true, but they are not so "dove"

After last month's interest rate meeting, there were two main points that detonated the market: Powell said at a press conference that he discussed the "prospect of interest rate cuts", while the median policy rate expectation for the end of 2024 fell to 4.6% in economic expectations from 5.1% in September, implying that the official forecast is "three rate cuts next year".

Seemingly over-frightened by the Wall Street revelry, the Fed's minutes immediately highlighted uncertainty right behind the expectations of interest rate cuts, which investors love to watch.

The minutes showed that participants discussed the policy outlook as they agreed that the current policy rate is "likely to be at or near" the peak of the current tightening cycle, although the actual policy path will still depend on the direction of the economy.

In recognition of its performance in fighting inflation in 2023, the Fed's latest interest rate decision finally stopped using the term "unacceptably high" to describe inflation, which is also the first time since June 2022. All participants also said they observed clear progress towards the inflation target in 2023.

In the section on "Risk Management Considerations That May Affect Future Policy Decisions", participants also noted that while inflation remains well above long-term targets and there is a risk of subsequent stagnation, upside risks to inflation have diminished. Some participants also pointed to downside risks related to excessive tightening. A few participants even mentioned that the Committee might face a trade-off between dual objectives in the future.

At the same time, almost all participants in their projections hinted that the target range for the federal funds rate by the end of 2024 should be lower. However, these participants also said that their expectations were linked to an unusually high level of uncertainty, and that the way the economy is going to evolve could make raising interest rates a more appropriate move. Participants continued to generally emphasize caution and reliance on data, and reiterated that it is appropriate to maintain a tightening stance for a certain period of time in order to ensure that inflation comes down significantly and sustainably.

In addition to rate cuts, several participants also mentioned stopping balance sheet reduction. They noted that it might be appropriate to end the process when bank reserves are "slightly above the level considered adequate". The officials said discussions would begin long before the balance sheet reduction stopped, so that the market was well informed.

But... There is one more problem

While the minutes made it clear that Powell was not exaggerating at the press conference, the problem is that the wording of the minutes alone could not support market expectations for a full 150 basis point rate cut this year.

Following the release of the interest rate decision, the CME Fed Watch tool showed that market expectations for the policy rate range by the end of the year were little changed, and that they still favored a 150 basis point rate cut for the full year.

(Source: CME)

In assessing progress in reducing inflation, participants also noted that the process of reducing inflation has not been uniform across its components, noting that prices for core services are still rising at a relatively high rate.

It is not difficult to see from the data that since August this year, the core CPI in the United States has been hovering around 4%. So today's minutes also once again pointed out the core concerns of Fed officials about the data.

（来源：tradingeconomics）

What makes the market even more frown is that the entire meeting minutes are flipped down, and there are no other useful clues other than "interest rate cuts in 2024".

Nick Timilaus, a well-known macro journalist known as the "Fed's mouthpiece", said that the minutes did not show a meaningful discussion on the important issue of when to cut interest rates.

Timmy Laus further noted that the minutes also showed divisions within Fed officials. Some officials believe that the easiest part of fighting inflation has been done as supply chains and labor markets recover from pandemic-related disruptions, and that higher interest rates will be needed to dampen economic activity next. Other officials, meanwhile, believe that the potential for supply-side improvements is likely to continue, prolonging the relatively easy and cost-free decline in inflation.

Because of this, the U.S. stock market, which continued to fall deeply today, rose for a short time with the news headlines after the release of the meeting minutes, and then returned to its original position.

The Fed's next decision will be announced on January 31 (early morning of February 1, Beijing time).

(Finance Associated Press Shi Zhengcheng)