Highlights
Federal Reserve policymakers, three weeks ago, agreed that the federal funds policy rate was"likely at its peak" for this tightening cycle, according to the minutes of the January 30-31 meeting. This outlook was based on rebalancing in the labor market and slowing inflationary pressures, two key factors that, however, have since re-accelerated.
At the time of the meeting, the Fed's economics staff maintained the view that the lagged effects of prior tightening would, both this year and next, pull actual output growth below potential growth. The staff further noted that uncertainty over their projections was decreasing. Yet given the strength of subsequent data following the meeting, uncertainty may not be decreasing at all.
January's nonfarm payroll growth of 353,000 (data released on February 2) was nearly double the consensus with December revised more nearly 120,000 higher to 333,000. Wage pressures had been cooling but re-accelerated sharply in January to 0.6 percent on the month, double the consensus, while the yearly rate rose 2 tenths to 4.5 percent versus expectations for 4.1 percent. Consumer prices in January matched or exceeded high-end forecasts, up 0.3 percent on the month overall and 0.4 percent for the ex-food ex-energy core. The latter annual rate failed to cool at all, holding steady at 3.9 percent and nearly double the two percent goal.
Though confident that their policy rate had peaked, FOMC members were not yet considering a near-term rate cut at their January meeting, generally noting that a cut would not be appropriate until they were more confident that inflation was moving sustainably toward two percent. Yet the minutes clearly reveal a bias toward optimism, that past policy actions (repeated again and again) and ongoing improvements in supply conditions (also repeated)"were working together to move supply and demand into better balance".
Nevertheless, most members remained patient and warned against moving too quickly to ease rates, a view justified by the recent data. A couple of participants, however, warned against maintaining an overly restrictive stance for too long, a view that may now be less convincing.
Returning back to inflation,"various" participants at the meeting noted that housing services inflation was likely to continue to fall given deceleration in rents on new leases. Yet rents in January's CPI report, rising 0.4 percent on the month, failed to cool while owners' equivalent rent reaccelerated from 0.4 to 0.6 percent.
In sum, what had been a careful and patient approach toward a rate cut at the last meeting, may now increasingly become, especially if the US economy continues to outperform, a cautious if not hesitant approach.
At the time of the meeting, the Fed's economics staff maintained the view that the lagged effects of prior tightening would, both this year and next, pull actual output growth below potential growth. The staff further noted that uncertainty over their projections was decreasing. Yet given the strength of subsequent data following the meeting, uncertainty may not be decreasing at all.
January's nonfarm payroll growth of 353,000 (data released on February 2) was nearly double the consensus with December revised more nearly 120,000 higher to 333,000. Wage pressures had been cooling but re-accelerated sharply in January to 0.6 percent on the month, double the consensus, while the yearly rate rose 2 tenths to 4.5 percent versus expectations for 4.1 percent. Consumer prices in January matched or exceeded high-end forecasts, up 0.3 percent on the month overall and 0.4 percent for the ex-food ex-energy core. The latter annual rate failed to cool at all, holding steady at 3.9 percent and nearly double the two percent goal.
Though confident that their policy rate had peaked, FOMC members were not yet considering a near-term rate cut at their January meeting, generally noting that a cut would not be appropriate until they were more confident that inflation was moving sustainably toward two percent. Yet the minutes clearly reveal a bias toward optimism, that past policy actions (repeated again and again) and ongoing improvements in supply conditions (also repeated)"were working together to move supply and demand into better balance".
Nevertheless, most members remained patient and warned against moving too quickly to ease rates, a view justified by the recent data. A couple of participants, however, warned against maintaining an overly restrictive stance for too long, a view that may now be less convincing.
Returning back to inflation,"various" participants at the meeting noted that housing services inflation was likely to continue to fall given deceleration in rents on new leases. Yet rents in January's CPI report, rising 0.4 percent on the month, failed to cool while owners' equivalent rent reaccelerated from 0.4 to 0.6 percent.
In sum, what had been a careful and patient approach toward a rate cut at the last meeting, may now increasingly become, especially if the US economy continues to outperform, a cautious if not hesitant approach.
Definition
Detailing the issues of debate and consensus among policymakers, the Federal Open Market Committee issues minutes of its latest meeting three weeks after the meeting.
Description
The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors guessing about policy changes and Fed officials did not appear on the speaking circuit as frequently as they do now.
The Fed's minutes are a market mover as investors and analysts parse each word looking for clues to policy. The minutes include the complete economic analysis compiled by Fed officials and opinions at odds with the consensus.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. Fed officials also make numerous speeches, which give their views to the public at large.
The Fed's minutes are a market mover as investors and analysts parse each word looking for clues to policy. The minutes include the complete economic analysis compiled by Fed officials and opinions at odds with the consensus.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. Fed officials also make numerous speeches, which give their views to the public at large.
