The latest release of the FOMC (Federal Open Market Committee) minutes from the meeting held on February 1st suggests that some members of the committee are concerned about the decoupling of financial conditions from monetary policy. This is in contrast to Chair Powell’s comments during the press conference following the meeting, where he declined to try to talk down financial markets and noted that it wasn’t up to him to persuade people.
According to the FOMC minutes, “participants noted that it was important that overall financial conditions be consistent with the degree of policy restraint that the Committee is putting into place in order to bring inflation back to the 2 percent goal.” Additionally, “several participants observed that some measures of financial conditions had eased over the past few months.”
However, Powell stated at the meeting that “financial conditions didn’t really change much from the December meeting to now” and that there is still a long way to go to catch up. Bloomberg’s sentiment model suggests that the minutes were more dovish than the last, which is the most dovish statement in at least two years.
Despite this, the odds of 25bp hikes in March, May, and June have all risen rapidly. All of which has prompted chaos across asset classes with gold and bonds down notably, bitcoin and the dollar stronger, and stocks fading fast in the last few days.
The FOMC minutes also reveal that in their consideration of appropriate monetary policy actions at the meeting, participants agreed that the Committee had made significant progress over the past year in moving toward a sufficiently restrictive stance of monetary policy. However, they also noted that inflation remained well above the Committee’s longer-run goal of 2 percent, and the labor market remained very tight, contributing to continuing upward pressures on wages and prices.
Almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting. Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability as they determine the extent of future policy tightening that will be required to attain a stance that is sufficiently restrictive to achieve these goals.
Despite this, a few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount. These participants noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way.
Furthermore, what all participants agreed on was it was appropriate to continue the process of reducing the Federal Reserve’s securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve’s Balance Sheet. Almost all participants observed that slowing the pace of rate increases at the current juncture would allow for appropriate risk management.
“A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures,” the FOMC minutes added. The Fed staff doesn’t see inflation moving back to 2 percent until 2025, stating that “with steep declines in consumer energy prices and a substantial moderation in food price inflation expected for this year, total inflation was projected to step down markedly this year and then to track.”