Fed Officials Push Back on Expectations to Cut Rates

The recently released Federal Reserve (Fed) minutes from the January 30-31 meeting shed light on the current stance of Fed officials regarding interest rates. The minutes show a cautious approach by policymakers, where concerns about inflation rates and the impact of interest rates on borrowing costs played a significant role in their decision-making process. Additionally, the minutes hinted at the expected move in interest rates in the upcoming months, providing insights into the Fed’s future policy moves.

One of the key discussions highlighted in the Fed minutes relates to inflation rates. Policymakers carefully assessed the inflation data, aiming to sustainably elevate the Consumer Price Index (CPI) while keeping it around the 2 percent target. Moreover, the impact of interest rates on borrowing costs was a focal point, with the Fed aiming to assess how rate changes could influence consumer borrowing trends and overall economic growth. These considerations were crucial in shaping the Fed officials’ outlook on future rate adjustments.

Despite some concerns about the economy, Fed officials remained hesitant to cut rates due to their risk assessment. The progress made in the economy since the last meeting was acknowledged, but factors such as uncertainty and downside risks influenced the decision to remain unchanged. Additionally, Federal Reserve officials expressed worries about the potential implications of lowering rates too quickly, emphasizing the need to carefully assess the situation before making any policy moves.

The main risk is re-inflation risk and this has kept the Fed from signalling no change and no rusch to lower rates.

How has the Fed’s outlook on rate cuts changed?

The Fed’s outlook seemed to prioritize a cautious approach based on concerns of stubborn inflation. Thus, the goldilocks scenario that called for cuts earlier is now pushed back to possibly June for the first cut. The benchmark federal-funds rate is at a range between 5.25% and 5.5%.

This means that borrowing costs in the economy, such as on mortgages, credit cards, auto loans, and business loans, are at a near a 23-year high.

Central banks are walking a fine line between keeping rates high and risking damage to the economy and cutting too early with the result that long-term inflation stays above the 2% mark. The choice by the Fed is to take the first risk and keep rates high. Part of the reason for this choice is that some Fed officials thought that the recent inflation numbers were due to one off reasons.