Worries over rate cuts persist

The January minutes made it pretty clear that Fed officials were wary of cutting rates too soon.

While most members believed rates were “likely at their peak,” there was still uneasiness over the inflation picture. 

The Fed remained “highly attentive” to inflation risks as officials worried whether progress might stall if consumer spending stayed strong.

“As an upside risk to both inflation and economic activity, participants noted that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year,” the minutes said.

Prior to the meeting, traders had been pricing in a high chance of rate cuts beginning as early as March. That hope has since faded, now most expect the first rate cut to come around the middle of year.

It’s also important to note the meeting was held before the release of the very strong January jobs report and the surprisingly hot consumer and producer price data.

“After those numbers, policymakers will feel vindicated and in even less of a hurry to start easing,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“The nature of turning points, however, is that things can change quickly, and we expect the labor market and inflation data by the time of the May meeting to signal that the Fed needs to ease.”

Investors further worry if the central bank maintains an overly restrictive stance for too long that could derail the economy and lead to a bumpier landing.