Fed Minutes: No support for rate cut this year, warns of premature turn to risk

　　Author: Fan Zhijing

　　In the early hours of Thursday morning Beijing time, the Federal Reserve released the minutes of its December policy meeting.

The minutes showed that the Federal Open Market Committee (FOMC) reiterated its commitment to containing inflation and expected to maintain higher interest rates until more progress was made.

After the announcement of the minutes, the US stock market took a short-term dive to give up its intraday gains, the US bond yields soared and fell back, the US dollar index fluctuated little, and the market's expectations for a 25 basis point rate hike in February were not significantly affected.

　　Slowing rate hikes does not mean weakening determination to stabilize inflation

　　At the interest rate meeting last month, the Federal Reserve decided to raise the target range of the federal funds rate by 50 basis points to 4.25%-4.50%. A promise that will hold until the task is completed.

　　The minutes of the latest meeting showed that the Federal Reserve welcomed the recent inflation data, but believed that the price level was still unacceptably high, and hoped to see more evidence of progress to be sure that inflation was continuing to decline.

Participants generally agreed that a restrictive policy stance would need to be maintained until data suggested that inflation would continue to fall to 2 percent, which would likely remain so for some time.

　　For future policies, the Fed will continue to focus on data and maintain flexibility and selectivity.

But the committee hopes the public shouldn't read too much into the move to slow the pace of rate hikes.

"Many participants emphasized that the slowdown in rate hikes did not mean that the Committee's determination to achieve its price stability objective had weakened, nor did it mean that inflation had been falling steadily," the minutes said.

　　Officials at the meeting argued that monetary policy plays an important role through the entire financial market, and if financial conditions loosen due to public "misunderstanding" of the committee's response, it will make it more difficult and complicated for the Fed to restore price stability.

　　No FOMC member currently expects a rate cut in 2023.

"No participant expected that it would be appropriate to start lowering the federal funds rate this year." From the content of the minutes, participants were focusing on two policy risks. The first is that the Fed did not maintain restrictive interest rates long enough and let inflation worsen , which would create a situation similar to that of the 1970s, followed by the Fed's restrictive policy going on for too long, leading to an unnecessary reduction in economic activity that would likely place the greatest burden on the most vulnerable.

　　Within the Fed, the risk of premature easing and uninflation is greater.

“Participants broadly expressed that upside risks to the inflation outlook remain a key factor in determining policy. From a risk management perspective, a continued restrictive policy stance is appropriate until inflation is significantly closer to 2 percent. Several participants commented He said that historical experience makes people vigilant not to loosen monetary policy prematurely."

　　How the Fed is ending its tightening cycle

　　As the U.S. enters the most aggressive cycle of rate hikes in nearly 40 years, inflation has begun to retreat from its highs in the middle of last year.

At present, the trend of commodity deflation has formed. The US Institute of Supply ISM manufacturing survey shows that the drop in demand has caused the US business spending price index to drop to a two-and-a-half-year low.

Housing inflationary pressures remain, but indicators suggest that rental inflation is slowing, with a turning point likely to come in the middle of the year.

　　Inflation in services, by contrast, is the thorniest conundrum.

The service industry is the largest component of the economy and is closely related to labor costs. As the job market continues to be tight, the related pressure on prices has yet to be released.

Speaking after last month's rate-setting meeting, New York Fed President John Williams said the fundamental problem with core services inflation remained.

San Francisco Fed President Mary Daly believes that not only needs to slow labor demand, but the unemployment rate must rise to ease upward pressure on wages.

"A lot of inflation has to do with the labor market," she said.

　　Bob Schwartz, a senior economist at Oxford Economics, said in an interview with a reporter from China Business News that it is expected that overall U.S. prices may fall at a steady and slow pace this year. The Fed’s attitude is clear, although at a slower pace rate hikes, but did not end the tightening cycle until it was confident that inflation would return to the medium-term target.

In his view, with the continuation of the task of fighting inflation, the risk of economic recession can not be ignored.

　　It is worth noting that according to the latest research report released by the St. Louis Fed, more than half of the 50 states in the United States have shown signs of slowing economic activity, which has broken through the key threshold that usually indicates that an economic recession is coming.

The Beige Book on economic conditions released by the Federal Reserve also showed that business activities in some areas are facing difficulties.

　　Federal rate futures were little changed after the minutes were released.

Markets expect the Fed to hike rates by 25 basis points each in February, March and May, pushing the upper end of the fed funds rate range to 5.25%.

Deutsche Bank believes that the Fed will further slow down in the future, which will have a greater chance to avoid excessive tightening, thereby reducing the pressure of monetary policy on the economy.

　　Different from the Fed's position, the market continues to bet that the policy inflection point will come earlier.

Investors remain confident that subdued inflation and a recession will cause the FOMC to change its stance on rate cuts.

The latest quotes show that the median rate at the end of the year was 35 basis points below its mid-year peak, which equates to policy space at least once.