Highlights
The minutes of the January 28-29 FOMC meeting reflect conditions three weeks ago as Fed Chair Jerome Powell prepared for his semi-annual monetary policy testimony on February 11-12.' Risks to the economic outlook remained roughly balanced and that current monetary policy was appropriate for an economy in sustained modest expansion with a solid labor market, and where disinflation was progressing, but not as quickly as before with inflation still somewhat elevated.
The FOMC anticipated that under appropriate monetary policy inflation would return to the 2 percent objective, although progress could remain uneven. The minutes said, Participants cited various factors as likely to put continuing downward pressure on inflation, including an easing in nominal wage growth, well-anchored longer-term inflation expectations, waning business pricing power, and the Committee's still-restrictive monetary policy stance. However, a few participants usually indicating three or four that the current target range for the federal funds rate may not be far above its neutral level. If so, it would imply that policy is not as restrictive as generally thought.
Among the risks to the inflation outlook, some participants thought the labor market was unlikely to be a source of inflationary pressure in the near future. Progress on disinflation could be negatively affected by potential changes in trade and immigration policy as well as strong consumer demand. Even though longer term inflation expectations remain well-anchored, in the near term prices could be higher as businesses pass on higher input costs.
The FOMC judged that labor market conditions had remained solid and that those conditions were broadly consistent with the Committee's goal of maximum employment.
The FOMC is keeping a close eye on financial stability, and some participants noted a range of factors that warranted monitoring. The range was broad. The minutes said, A few commented that bank funding risks had lessened and that many banks had improved their ability to access the discount window; however, a couple observed that some banks had increased their reliance on reciprocal deposits, and that the stability of these deposits had not been tested in a time of stress. Several participants noted that some banks remained vulnerable to a rise in longer-term yields and the associated unrealized losses on bank assets. Several participants also mentioned potential vulnerabilities at nonbank financial institutions or nonfinancial corporations to a rise in longer-term yields or to leverage in these sectors. A few participants noted concerns about asset valuation pressures in equity and corporate debt markets. A few participants discussed vulnerabilities associated with CRE exposures, noting that risks remained, although there were some signs that the deterioration of conditions in the CRE sector was lessening. Several participants commented on cyber risks that could impair the operation of financial institutions, financial infrastructure, and, potentially, the overall economy. Several participants commented on vulnerabilities in the Treasury market, including concerns about dealer intermediation capacity and the degree of leveraged positions in the market. The migration to central clearing was noted by a few as an important development to track in this regard.
In setting monetary policy, a majority of participants observed that the current high degree of uncertainty made it appropriate for the Committee to take a careful approach in considering additional adjustments to the stance of monetary policy. Factors mentioned by participants as supporting such an approach included the reduced downside risks to the outlook for the labor market and economic activity, increased upside risks to the outlook for inflation, and uncertainties concerning the neutral rate of interest, the degree of restraint from higher longer-term interest rates, or the economic effects of potential government policies.
At present, monetary policy was deemed well positioned to react to any risks and to respond as appropriate with new economic data.
Some thought was given to managing the Fed's reserve holdings of US treasuries and agency mortgage-backed securities. A number of participants also discussed some issues related to the balance sheet. Regarding the composition of secondary-market purchases of Treasury securities that would occur once the process of reducing the size of the Federal Reserve's holdings of securities had come to an end, many participants expressed the view that it would be appropriate to structure purchases in a way that moved the maturity composition of the SOMA portfolio closer to that of the outstanding stock of Treasury debt while also minimizing the risk of disruptions to the market. No decisions were made but it is probable that the FOMC is looking ahead to winding down the current program of reinvestment caps for treasuries and agency MBS holdings.
Participants also kept in mind the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event.
The meeting included a discussion of the five-year review of monetary policy strategy, tools, and communications.
The first meeting of the year is the one at which the voting rotation takes place among the presidents of the district banks. Powell was confirmed as chair of the FOMC, John Williams of the New York Fed was confirmed as vice chair. Voters in 2025 through the first meeting in 2026 are Susan Collins of Boston, Austan Goolsbee of Chicago, Alberto Musalem of St. Lous, and Jeffrey Schmid of Kansas City.
The FOMC anticipated that under appropriate monetary policy inflation would return to the 2 percent objective, although progress could remain uneven. The minutes said, Participants cited various factors as likely to put continuing downward pressure on inflation, including an easing in nominal wage growth, well-anchored longer-term inflation expectations, waning business pricing power, and the Committee's still-restrictive monetary policy stance. However, a few participants usually indicating three or four that the current target range for the federal funds rate may not be far above its neutral level. If so, it would imply that policy is not as restrictive as generally thought.
Among the risks to the inflation outlook, some participants thought the labor market was unlikely to be a source of inflationary pressure in the near future. Progress on disinflation could be negatively affected by potential changes in trade and immigration policy as well as strong consumer demand. Even though longer term inflation expectations remain well-anchored, in the near term prices could be higher as businesses pass on higher input costs.
The FOMC judged that labor market conditions had remained solid and that those conditions were broadly consistent with the Committee's goal of maximum employment.
The FOMC is keeping a close eye on financial stability, and some participants noted a range of factors that warranted monitoring. The range was broad. The minutes said, A few commented that bank funding risks had lessened and that many banks had improved their ability to access the discount window; however, a couple observed that some banks had increased their reliance on reciprocal deposits, and that the stability of these deposits had not been tested in a time of stress. Several participants noted that some banks remained vulnerable to a rise in longer-term yields and the associated unrealized losses on bank assets. Several participants also mentioned potential vulnerabilities at nonbank financial institutions or nonfinancial corporations to a rise in longer-term yields or to leverage in these sectors. A few participants noted concerns about asset valuation pressures in equity and corporate debt markets. A few participants discussed vulnerabilities associated with CRE exposures, noting that risks remained, although there were some signs that the deterioration of conditions in the CRE sector was lessening. Several participants commented on cyber risks that could impair the operation of financial institutions, financial infrastructure, and, potentially, the overall economy. Several participants commented on vulnerabilities in the Treasury market, including concerns about dealer intermediation capacity and the degree of leveraged positions in the market. The migration to central clearing was noted by a few as an important development to track in this regard.
In setting monetary policy, a majority of participants observed that the current high degree of uncertainty made it appropriate for the Committee to take a careful approach in considering additional adjustments to the stance of monetary policy. Factors mentioned by participants as supporting such an approach included the reduced downside risks to the outlook for the labor market and economic activity, increased upside risks to the outlook for inflation, and uncertainties concerning the neutral rate of interest, the degree of restraint from higher longer-term interest rates, or the economic effects of potential government policies.
At present, monetary policy was deemed well positioned to react to any risks and to respond as appropriate with new economic data.
Some thought was given to managing the Fed's reserve holdings of US treasuries and agency mortgage-backed securities. A number of participants also discussed some issues related to the balance sheet. Regarding the composition of secondary-market purchases of Treasury securities that would occur once the process of reducing the size of the Federal Reserve's holdings of securities had come to an end, many participants expressed the view that it would be appropriate to structure purchases in a way that moved the maturity composition of the SOMA portfolio closer to that of the outstanding stock of Treasury debt while also minimizing the risk of disruptions to the market. No decisions were made but it is probable that the FOMC is looking ahead to winding down the current program of reinvestment caps for treasuries and agency MBS holdings.
Participants also kept in mind the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event.
The meeting included a discussion of the five-year review of monetary policy strategy, tools, and communications.
The first meeting of the year is the one at which the voting rotation takes place among the presidents of the district banks. Powell was confirmed as chair of the FOMC, John Williams of the New York Fed was confirmed as vice chair. Voters in 2025 through the first meeting in 2026 are Susan Collins of Boston, Austan Goolsbee of Chicago, Alberto Musalem of St. Lous, and Jeffrey Schmid of Kansas City.
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.
