February 19, 2025

QuickTakes

Mind The Minutes

The Minutes from January's FOMC meeting was released today. On balance, it confirmed that the Fed is on hold but still leaning toward lowering the federal funds rate some more if and when inflation falls closer to 2%. It's a dovish pause, which is supportive of both stocks and bonds. Consider a few key points, as well as recent economic data:

(1) Inflation outlook. FOMC participants expressed concern that Trump 2.0's trade and immigration policies increase the risk of higher inflation. On the other hand, FOMC participants said that high January inflation should be followed by lower prints in coming months.

(2) Balance-sheet outlook. The FOMC said it may pause or slow quantitative tightening (QT) due to the debt ceiling impasse and associated volatility in reserve balances. Typically, the Treasury Department's extraordinary measures involve spending down its account at the Fed, then issuing loads of Treasury bills to refill it (chart). The first part of this scenario boosts reserves, the latter drains them rapidly and risks disrupting market functioning.

We don't think this is a necessary measure, but the Fed's willingness to pause QT (perhaps indefinitely) means less selling pressure on Treasuries. Reserve balances have been elevated at or above $3 trillion throughout nearly three years of QT.

(3) Treasury issuance outlook. FOMC participants also suggested that they'd like the Fed's balance-sheet holdings to have shorter duration. That would align with the Treasury's current strategy of issuing more bills (chart).

(4) Inflation reheating? FOMC participants should be worried about new sources of inflation. Prices paid and received measures in the New York Fed’s regional M-PMI jumped to post-pandemic highs in February (chart).

However, FOMC participants also noted substantial economic optimism among businesses due to expected deregulation and tax cuts. We've discussed the potential of these animal spirits since the November election.

(5) Global inflation rebound. Global price pressures are also reheating. The UK CPI reached 3.0% in January, led by core inflation (chart). The BOE recently said it will cut interest rates to spark growth, but any trade disruptions may be felt across global goods prices quickly and force central banks to reconsider further easing.

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