FOMC meeting minutes, January 30-31

Moving carefully amid elevated uncertainty

The minutes of the January Federal Open Market Committee (FOMC) meeting reaffirmed the Fed’s careful approach to monetary policy with most participants noting the risks of “moving too quickly” in cutting the federal funds rate. The minutes also highlighted the notion that officials want more confidence that inflation is moving down sustainably to 2%, by emphasizing the “importance of carefully assessing incoming data.”

The FOMC’s unanimous decision to hold the federal funds rate at 5.25%–5.50% in January wasn’t surprising, but Fed Chair Jerome Powell’s candid pushback against a March rate cut was when he said, “I would tell you that I don’t think it is likely that the Committee will reach a level of confidence by the time of the March meeting.”


The minutes provided color to this statement with FOMC participants highlighting the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained. While there is a broad consensus that the policy rate is likely at its peak, and officials view risks to the outlook as more balanced, there is still lingering fear that inflation could reignite. Only a couple of participants stressed the risks associated with policy being overly restrictive.


In discussing the uncertainty surrounding the economic outlook, participants noted the risk of more resilient final demand growth leading to renewed inflationary pressures. Several participants also noted the risk that financial conditions “were or could become less restrictive than appropriate, which could add undue momentum to aggregate demand and cause progress on inflation to stall.” Geopolitical risks and lingering wage growth pressures were also considered as potential upside risks to inflation.


Importantly though, participants also stressed downside risks to growth and inflation from weaker global growth, geopolitical risks, and excessively tight financial and monetary policy conditions. In what we believe will become the prevailing view, participants also stressed the upside risks to growth and downside risks to inflation from favorable supply side development and productivity growth.


Participants noted that the balance sheet runoff had been proceeding smoothly, and that in light of ongoing reductions in usage of the overnight reverse repurchase agreement facility, it would be appropriate to start in-depth discussion on when to slow the pace of runoff. Given the uncertainty surrounding estimates of the ample level of reserves, some participants suggested that “slowing the pace of runoff could help smooth the transition to that level of reserves or could allow the Committee to continue balance sheet runoff for longer.” 


Overall, these minutes highlight how Fed policymakers want to avoid being seen as having eased monetary prematurely if inflation were to reignite. Having been late in tightening monetary policy, Fed officials are in no rush to start cutting rates. While they say risks to the outlook are balanced, the fear of bad optics clearly tilts the balance toward being more restrictive than expected conditions would dictate. 


In our view, January economic data is too noisy for interpretation and policy calibration. We believe the inflation picture is likely not as hot as the latest Consumer Price Index and Producer Price Index reports suggest while the labor market picture is likely not as rosy as painted by the strong January jobs report. But neither is the state of housing, consumer spending and industrial production as weak as the January data seemingly indicates. 


In sum, we maintain our long-standing view that the Fed will start cutting rates in May with 100 basis points of rate cuts this year. We believe the Fed will start tapering its quantitative tightening process in the second half of the year, after the first rate cut.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.