Late yesterday, the United States Federal Open Market Committee (FOMC) released the minutes from its January meeting on interest rates.
And, while many reported on the Fed’s caution with cutting rates too soon, we’re betting you already knew that.
Here, five things from the FOMC meeting minutes which you may not have picked up on:
1. Don’t expect inflation to go away as fast as interest rates
The minutes explicitly stated that “the staff placed some weight on the possibility that further progress in reducing inflation could take longer than expected.”
2. Economic growth may come slower than America realises
The data available at the time of the January 30–31 meeting indicated that growth in U.S. real gross domestic product (GDP) was solid in the fourth quarter of 2023 but had stepped down from the third quarter’s strong pace.”
The minutes added that “private domestic final purchases— which often provides a better signal than GDP of underlying economic momentum—also rose solidly, though at a slower rate.”
3. The U.S. labour market is not out of the woods yet
Increasing jobs and decreasing unemployment (and the increased spending that comes with those things) is the backbone of real economic growth.
To this end, things are improving but are not without risks of backpedalling, as the minutes said that “the unemployment rate remained at 3.7 percent in December, the same as its third-quarter average.”
But qualified this, adding that:
However, the labour force participation rate moved down, as did the employment-to-population ratio… The private-sector job openings rate was little changed in November and December.”
4. Gold as an investment has taken a knock, in the wake of a stronger dollar and stock market
The good news for investors is that the stock market is in a stable place, and so is the dollar, but this does bring a downside for the gold price:
The one-month option-implied volatility on the S&P 500 increased somewhat over the period but remained low by historical standards.”
And as for the USD:
Movements in foreign markets over the intermeeting period were modest, on net, with most foreign asset prices and the exchange value of the dollar little changed.”
5. The U.S. financial sector is particularly exposed to risk right now
Finally, and perhaps most concerningly, that financial industry stalwarts like banks had “notable” risk and were over-leveraged in this time, exposing them to danger should the tides turn unexpectedly.
The fair value of banks’ longer-term fixed-rate assets, including loans, increased in the fourth quarter as longer-term interest rates decreased, though banks remained vulnerable to significant increases in longer-term interest rates.”
The insurance sector was even more troubling:
Insurers had been increasing their investments in risky corporate debt. Funding risks were also characterized as notable.”
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