FOMC Minutes Indicate the Fed May Slow Its Bond Runoff

Rates decline slightly on news that the Fed may slow quantitative tightening. The policy-sensitive short end of the yield curve declined ~4 bps today, largely driven by FOMC minutes that revealed the Fed has concerns about aggressive quantitative tightening. Fed Funds futures-implied odds for just one 25 bp rate cut in 2025 have increased over the past few weeks; the odds for one versus two rate cuts are now priced in as 50/50. Meanwhile, equities were little changed today, though the S&P 500, now at 6,144 extended its all-time highs after a 0.24% gain.

FOMC meeting minutes highlight the Fed’s cautious approach. FOMC minutes released from January’s meeting were consistent with rhetoric that has been echoed over the past few months. Officials stated that “provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.” That tone has only strengthened since last week, where data showed that January CPI and PPI were generally above forecasts. Fed Vice Chair Jefferson said today that the inflation battle will be “bumpy” and that the Fed can “take our time to assess the incoming data to make any further adjustments to our policy rate,” while Atlanta Fed President Bostic also voiced support for a pause.  

The Fed may also pause quantitative tightening. Some officials voiced concerns about continuing aggressive quantitative tightening while the debt ceiling is being resolved. System Open Market Account manager Roberto Perli warned that reserves could decline rapidly if the debt ceiling is resolved and added, “at the current pace of balance sheet runoff, [reserves] might potentially reach levels below those viewed by the Committee as appropriate.” Debt ceiling resolutions could yield an exodus of Treasury issuance, leaving the banking system short of adequate liquidity.