According to the minutes from the latest Federal Open Market Committee (FOMC) meeting held on March 19-20, Federal Reserve policymakers expressed a general preference for reducing the rate at which they’re shrinking the central bank’s asset portfolio by approximately half.
Additionally, the meeting record indicated that “almost all” officials agreed it would be suitable to commence lowering borrowing costs at some point within this year. However, subsequent inflation data has shifted expectations regarding the likelihood of three interest-rate cuts occurring in the same timeframe.
The discussion among policymakers centered on the process of slowing down the unwinding of their extensive balance sheet, commonly referred to as quantitative tightening (QT). While no definitive decisions were reached during the meeting, it was acknowledged that the disinflation process was progressing somewhat unevenly.
The majority of participants deemed it prudent to begin scaling back the pace of runoff in the near future, particularly considering the market disruptions experienced in 2019 during the Fed’s previous attempt to reduce its portfolio.
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Fed Chair Jerome Powell mentioned during a press conference on March 20 that the Fed is contemplating a reduction in the pace of asset runoff to ensure a smooth transition and prevent potential stress in money markets.
Furthermore, officials generally favored maintaining the existing cap on mortgage-backed securities while adjusting the cap on Treasuries.
There’s keen interest from Wall Street in determining the appropriate level of bank reserves to ensure liquidity and prevent past financial market crises. Currently, institutions hold nearly $3.5 trillion in cash reserves at the Fed.
The minutes also highlighted policymakers’ reluctance to implement rate cuts until there is substantial evidence that inflation is firmly on track to reach the 2% target, which is seen as optimal for a healthy economy.
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Recent consumer price data indicated a persistent rise in inflation, surpassing economists’ expectations for the third consecutive month. This trend weakens the case for immediate rate cuts and suggests fewer cuts may be necessary in 2024.
Some Fed officials have expressed the possibility of no rate cuts this year if inflation continues to disappoint. Investors, based on futures markets, anticipate fewer than two rate reductions in 2024, with the earliest expected move in September.
In their post-meeting statement, policymakers unanimously agreed to maintain interest rates within the range of 5.25% to 5.5% until they gain greater confidence in the trajectory of inflation toward the 2% target.
Fed Chair Powell emphasized the importance of allowing data to guide policy decisions, given the robustness of the economy and progress on inflation thus far.
The US labor market remains strong, with 829,000 jobs added in the first three months of the year, supported by robust consumer demand.
In their quarterly economic projections, Fed officials revised their estimates for 2024 growth upward to 2.1% and anticipated core inflation to reach 2.6% by the end of the year.
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