Fed minutes show support for pause, flags possible hikes to fight inflation

The minutes of the Federal Reserve’s January monetary policy meeting on Wednesday showed that almost all participants supported the decision to hold interest rates steady.

However, they also hinted that several participants were ready to consider rate hikes in the future if inflation remained above the central bank’s target of 2%.     
According to the CME FedWatch tool, market participants see the Fed restarting monetary policy easing with a 25 basis point cut in June.

The Federal Open Market Committee (FOMC) in late January kept its key policy rate unchanged after three successive 25 basis point cuts, citing an improving economic growth outlook and labor market. The committee deemed that after a total of 75 basis points of easing, the current stance at 3.50%-3.75% was appropriate.

Economic data since the Fed’s January meeting has included a blowout nonfarm payrolls report and a consumer inflation report that showed a moderation in prices, giving the Fed more room to hold rates steady and assess further indicators.

“In their consideration of monetary policy at this meeting, participants noted that inflation had remained somewhat elevated and that available indicators suggested that economic activity had been expanding at a solid pace. They observed that job gains had remained low and that the unemployment rate had shown some signs of stabilization,” the FOMC said in a statement.

“Against this backdrop, almost all participants supported maintaining the current target range for the federal funds rate at this meeting, while a couple of participants preferred to lower the target range,” the committee added.  

’Two-sided description’

In their discussions about the outlook for monetary policy, several FOMC participants said that they would have “supported a two-sided description of the Committee’s
future interest rate decisions.”

This description reflects the “possibility that upward adjustments to the target range for
the federal funds rate could be appropriate if inflation remains at above-target levels,” the committee elaborated. 

The latest consumer price index report for January last week showed a moderation in headline prices on a M/M basis. The Fed, however, considers the personal consumption expenditures price index as its preferred inflation gauge. The latest reading for that is due on Friday.   

“Some participants commented that it would likely be appropriate to hold the policy rate steady for some time as the Committee carefully assesses incoming data,” the FOMC said.

The committee noted that a “number of these participants” felt that further rate cuts may in fact not be needed at all until there were clear signs that “the progress of disinflation was firmly back on track.”  

The minutes come at a time when there has been uncertainty around the future actions of the central bank, especially after President Donald Trump’s nomination of former Governor Kevin Warsh as the next chair. Meanwhile, the threat to the Fed’s independence is also at the back of traders’ minds amid an ongoing investigation into current chair Jerome Powell.