Fed Not Risking Moving Too Fast To Cut Rates

Federal Reserve officials made it clear that they are aware f the risks of moving too soon with rate cuts in this current environment, according to the minutes from January’s meeting.

• “Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent.”

Inflation Risk. “Some participants noted the risk that progress toward price stability could stall, particularly if aggregate demand strengthened or supply-side healing slowed more than expected.” Officials noted the “momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year.”

• Some officials were also concerned about “possible disruptions to supply chains from geopolitical developments, a potential rebound in core goods prices as the effects of supply-side improvements dissipate, or the possibility that wage growth remains elevated.” All of which could put upward pressure on prices.

Downside Risks. Deflationary surprises were also discussed. They included “geopolitical risks that could result in a material pullback in demand, possible negative spillovers from lower growth in some foreign economies, the risk that financial conditions could remain restrictive for too long, or the possibility that a weakening of household balance sheets could contribute to a greater-than-expected deceleration in consumption.”

Good News. “In the discussion of financial stability, participants observed that risks to the banking system had receded notably since last spring, though they noted vulnerabilities at some banks that they assessed warranted monitoring.”

Looking Ahead. It does not appear as if the FOMC is even in a place top discuss as cut as Fed officials noted that “that 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.”

• Balance Sheet. “Participants observed that the continuing process of reducing the size of the Federal Reserve’s balance sheet was an important part of the Committee’s overall approach to achieving its macroeconomic objectives and that balance sheet runoff had so far proceeded smoothly.”

BOTTOM LINE: The Fed clearly wants to be confident that inflation is falling before they even think about lowering rates.