Investors will get more details Wednesday around what prompted Federal Reserve officials to move forward with plans to slow the pace of its balance-sheet runoff, even as the central bank keeps the benchmark fed-funds rate steady.
The minutes from the latest Federal Open Market Committee’s meeting will be released on Wednesday at 2 p.m., and should provide some additional insight into how officials determined how and when to slow the pace of reducing its securities holdings.
At the conclusion of the most recent April 30-May 1 meeting, policymakers noted that starting in June, the monthly cap on Treasury securities that it allows to mature and not replace would be reduced to $25 billion from $60 billion. The central bank plans to maintain the monthly redemption cap on mortgage-backed securities at $35 billion, stating that it will reinvest any principal payments in excess of this into Treasury securities.
“The decision to slow the pace does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach this ultimate level more gradually,” Fed Chair Jerome Powell said during the May postmeeting news conference.
A more-detailed summary of the discussion regarding the balance-sheet decision could prove interesting, wrote Santander’s chief economist Stephen Stanley. Particularly given that Kansas City Fed President Jeffrey Schmid, a former banking executive and a nonvoting member of the committee this year, has publicly stated that he was not in favor of the move. “I am curious whether there was additional disagreement,” Stanley wrote.
Investors will also be looking for details on how Fed policymakers are weighing the trajectory of inflation and the three rate cuts that officials previously penciled in for 2024. Fed officials opted to keep the target for the federal-funds rate at 5.25-5.50%, with Powell noting that the current stance is appropriately restrictive and preserves maximum flexibility and optionality.
But Citi’s Andrew Hollenhorst said that the economic data released so far this month—including the consumer price index that showed a welcome slowdown in inflation—and the recent remarks from Fed speakers makes the minutes “stale” at this point.
“Since the May 1st FOMC meeting, a slowdown in job growth and outright declines in retail sales and industrial production will have officials more convinced that growth is slowing down,” Hollenhorst wrote. Wednesday’s minutes are likely to reiterate that officials believe policy rates are currently restrictive and that the committee will not consider cuts until they gain more confidence that inflation is slowing to the central bank’s 2% target.
The speeches from Fed officials that have come in the wake of Powell’s May 1 press conference have been sounding less “dovish” and more cautious than Powell did, wrote Thierry Wizman, global FX and rates strategist at Macquarie. “We expect that the tone will be likewise in the FOMC minutes released on Wednesday,” he wrote, adding that he expects policymakers will raise their estimates of the appropriate long-run neutral rate over time.
It’s unlikely that Wednesday’s release of the FOMC Minutes will change the overall macroeconomic narrative, wrote Anthony Saglimbene, chief market strategist at Ameriprise.