MNI: FOMC Cautious On Cuts, To Start QT Taper Debate in March

Most Federal Reserve officials warned against the possibility of easing monetary policy too fast at their January meeting, while also deciding they will debate a slowing in the pace of asset runoffs at their March meeting, minutes published Wednesday showed.

Policymakers thought the risks to the Fed’s dual mandate of stable prices and maximum employment were becoming more balanced, but also remain cautious about the prospect of cutting interest rates, the minutes said.

“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%,” the report said.

“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. Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained.”

The minutes did not point to any kind of broad discussion about the optimal timing of interest rate cuts expected later this year.

"Members agreed, given their assessment of the policy rate being likely at its peak for this tightening cycle, to remove the reference to 'the extent of any additional policy firming that may be appropriate to return inflation to 2% over time,' as was included in the
December statement," the FOMC said.

QT TAPER DEBATE

Policymakers think March is the right time to begin discussing when to slow the pace of QT.

“Many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee’s next meeting to guide an eventual decision to slow the pace of runoff,” the minutes said.

“A few participants noted that the process of balance sheet runoff could continue for some time even after the Committee begins to reduce the target range for the federal funds rate.”

Officials in recent weeks have signaled they are in no rush to start cutting interest rates, although they are cognizant that waiting too long could cause them to botch a vaunted soft landing that for now looks within reach.

The Fed's baseline seems to be that it will start cutting rates around June and do so gradually, perhaps by a quarter point at every other meeting. As of the December Summary of Economic Projections, the median estimate from policymakers was for three rate reductions this year.

Market expectations for Fed policy this year have swung fairly wildly in recent months. Investors took a dovish December press conference as a green light to take on risk, thus loosening financial conditions sharply and pricing in as many as six rate cuts this year, beginning as early as next month.

However, a disappointing CPI reading for January that showed broad-based price pressures including a 3.9% core figure, has since led to some repricing, with fed funds futures taking a March cut off the table and even doubting the likelihood of a possible May move.