Pouring cold water on the recent interest rate cut! The Federal Reserve opens the door to rate cuts, but suggests that it will not act quickly.

As expected by the market, the Federal Reserve (Fed) remained unchanged and removed the wording that hinted at future rate hikes, but at the same time poured cold water on market participants who expected a rate cut in the near future. On Wednesday, January 31, Eastern Time, the Fed announced after the Federal Open Market Committee (FOMC) meeting that it would keep the target range for the federal funds rate at 5.25% to 5.50%. Since the rate hike in July 2023, the Fed's policy rate has remained at a 22-year high. Thus, in this round of tightening cycle from March 2022 to the present, the Fed has not raised rates in four consecutive meetings. Like the previous 12 meetings since July 2022, all FOMC voting members voted in favor of the rate decision. Before the announcement of the resolution on Wednesday, journalist Nick Timiraos, known as the "New Fed News Agency," had already predicted that the Fed would remove the wording that implied further rate hikes. In his article, he stated that the Fed was prepared for a rate cut, and the question now was when to take action. After the announcement of the resolution, Timiraos wrote that since the rate hike in July last year, the Fed has always put the possibility of rate hikes on the table. This time, the Fed abandoned this rate guidance, and the officially adjusted new guidance is flexible, allowing the Fed to cut rates as long as it is confident that inflation risks are alleviated in the coming months. At the same time, the Fed indicated that the change in guidance does not imply an imminent rate cut. Removal of judgments on possible additional tightening and addition of more confidence in inflation reaching the target before rate cuts are appropriate This resolution statement made significant adjustments to the forward guidance on interest rates. The statement from the previous meeting in December reiterated the statement made in July 2023 that "the Committee will continue to assess new information and its implications for monetary policy" and modified the wording to "to judge any additional policy tightening that may be appropriate to allow inflation to return to 2% over time, the (FOMC) Committee will take into account the cumulative tightening of monetary policy, the lagged effects of monetary policy on economic activity and inflation, and changes in economic and financial conditions." This statement has been completely removed in this resolution. The new statement added two sentences: "In considering any adjustments to the target range for the federal funds rate, the (FOMC) Committee will carefully assess incoming data, evolving risks to the outlook, and balance of risks. The Committee expects that it will be appropriate to maintain the current target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals." The statement then continued to emphasize that the Fed remains committed to achieving its goal of bringing inflation back to 2%. Some commentators have noted that the language in the statement, which suggests that more confidence is needed before rate cuts are appropriate, is more hawkish than previously expected. Removal of comments related to the banking and financial environment and addition of a more balanced approach to employment and inflation targets In the resolution statement, the Fed reiterated its commitment to achieving maximum employment and a 2% inflation rate in the long run. Unlike the previous meeting statement, this statement removed all evaluations related to the financial system. Last time, it reiterated that "the U.S. banking system is sound and resilient" and pointed out that "a tighter financial and credit environment for households and businesses may put pressure on economic activity, hiring, and inflation," and the extent of these impacts is uncertain. This time, these statements have been completely removed, and a new sentence has been added: "The Committee judges that the risks to achieving its employment and inflation goals are moving toward a better balance." Following this sentence, the Fed continues to emphasize that it is still "closely monitoring inflation risks," but adds a half-sentence before this, stating that the economic outlook is uncertain. Timiraos believes that compared to the previous statement, which mentioned whether it is appropriate to increase tightening, this time it suggests that the risks to achieving dual goals are more balanced and mentions that changes in the economic outlook may prompt the Fed to adjust its policies. These changes make the Fed's stance appear more neutral. In terms of economic assessment, there have also been some changes in this statement compared to the previous one. The previous statement stated that "recent indicators show that economic activity has slowed compared to the strong pace in the third quarter," while this statement states that "recent indicators show that economic activity is expanding at a steady pace." In terms of the labor market, this statement largely follows the wording of the previous two meeting statements, stating that employment growth has slowed since earlier last year but remains strong, and reiterates the low unemployment rate. Like the post-meeting statements since May 2023, this statement still considers inflation to be "elevated" and reiterates the assessment in the previous statement that inflation has slowed over the past year but remains elevated. In May 2022, the Fed announced its plan to reduce its balance sheet, starting from June 1 of the same year, reducing bond holdings by a maximum of $30 billion in U.S. Treasury securities and $17.5 billion in agency mortgage-backed securities (MBS) per month, with the maximum monthly reduction size doubling after three months. Like the previous 12 meetings, this meeting's statement did not announce a new plan and continued to reiterate that it will continue to reduce holdings of Treasury securities, agency debt, and agency MBS according to the previously announced plan. The red text below shows the deletions and additions in this resolution statement compared to the previous one.