As surprises go today’s release of the Federal Reserve’s minutes from its January meeting doesn’t rank up there with Agatha Christie. (Remember 10 Little Indians? Where the murderer turns out to be someone who had earlier faked his own murder?)
But still as Fed minutes go, this was surprising stuff.
First, the minutes show Fed officials in remarkable agreement about the need to end the Fed’s $50 billion a month reduction in the size of its balance sheet (by not buying new Treasuries to replace those that mature.) The remarkable consensus points to sometime in 2019 for an end to the program. Some Wall Street economists are now talking about an announcement of a timetable to end the drawdown at the March meeting.
This is a “good” surprise from the financial market’s point of view since the $50 billion a month reduction in the size of the Fed’s portfolio is widely seen as equivalent to an increase in benchmark interest rates since the program acts to shrink the money supply. (The Fed balance sheet is now down to about $4 trillion from $4.5 trillion at the peak of the global financial crisis.)
Second, the minutes don’t show any signs of a discussion of cutting interest rates in response to an economic slowdown or economic uncertainties. Instead the discussion is about when and under what circumstances it still might be appropriate to raise interest rates again in 2019. Wall Street is seeing this as a surprising bias at the Fed toward higher interest rates. The minutes should certainly give pause (perhaps just a tiny one, though) to any in the financial community who assume that the next move on interest rates is certain to be downward.
The minutes did shift the odds on interest rate increases and decreases slightly in the prices on the Fed Funds Futures market that the CME’s FedWatch tool uses to calculate the chances of a Fed move.
Odds for an interest rate increase at either the March 20 or May 1 Fed meeting soared to 1.3% from 0% a day ago. The odds of an interest rate cut later in the year moved up to 10.8% at the December 11 meeting and to 19.4% at the January 20, 2020 meeting