Fed Minutes Confirm that FOMC Will Take a Cautious Approach to Rate Cuts

The minutes from the January 30-31, 2024 Federal Open Market Committee (FOMC) highlight that the Fed has not declared victory in its fight against inflation, and that curtailing price pressures remains the current focus for the Fed.

On the current economic backdrop, Committee members noted that “recent indicators suggested that economic activity had been expanding at a solid pace. Real GDP growth in the fourth quarter of last year came in above 3 percent at an annual rate, below the strong growth posted in the third quarter but still above most forecasters’ expectations.”

When discussing the appropriate policy actions, “all participants judged it appropriate to maintain the target range for the federal funds rate at 5¼ to 5½ percent at this meeting.” This was supported by the progress made on inflation and that the labor market had continued to come into better balance.

On the future path of policy, Committee members viewed ” that the policy rate was likely at its peak for this tightening cycle.” Additionally, FOMC members stated that it is unlikely to reduce the target rate until they gained “greater confidence” that inflation is on a sustainable path to its target.

When discussing the risks to achieving their dual mandate, FOMC members stated that “the risks to achieving the Committee’s employment and inflation goals were moving into better balance, they remained highly attentive to inflation risks.” Additionally, “most” participants noted the risks of moving prematurely, while a “couple” pointed to the risks of leaving rates in a restrictive position for too long.

Key Implications

With rate cuts highly expected in 2024, the timing and pace of cuts has become the focus of financial markets. Today’s minutes reiterated that the Fed will take a patient approach to easing policy stating “they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent”. This has been echoed by Chair Powell and several FOMC speakers. The cautious rhetoric can be seen in financial markets with the U.S. 2-year treasury yield adding close to 40 basis points since the beginning of February.

Since the January FOMC meeting, employment and inflation data have both surprised to the upside underscoring the need for the Fed to take a prudent approach to easing policy as the path to price stability will likely be uneven. This has also been reflected in financial markets, which have pared back their expectations for rate cuts in 2024. While economic resilience was the theme for the U.S. economy in 2023, we expect a modest slowdown in economic growth in 2024, setting the stage for the Fed to begin easing policy in the second half of the year.