In a significant moment for the financial markets, the Federal Reserve has made a crucial announcement regarding its monetary policyAs the world's largest economy grapples with persistent inflationary pressures, the central bank's latest communications indicate a potential shift in its strategies aimed at bolstering economic stability.

At 2 a.mBeijing time on April 11, 2024, the Federal Reserve released the minutes from its policy meeting held in MarchThis report unveiled that many officials are apprehensive about inflation not dropping back to the target rate of 2% in the near futureDespite these worries, there are expectations for a possible rate cut later in the year, alongside hints at slowing the pace of its quantitative tightening measures.

Nevertheless, the day prior to these minutes being released was marked by a significant downturn in the stock markets

The U.SConsumer Price Index (CPI) data for March exceeded forecasts, leading to a sharp decline across major U.Sstock indicesFollowing the Fed's announcement, the indices showed some recovery, with the Dow Jones Industrial Average closing down 1.09%, the NASDAQ down 0.84%, and the S&P 500 down 0.95%.

The latest Federal Reserve meeting minutes

In the recent meeting minutes, the Federal Reserve officials provided insights into their deliberations about the U.Seconomy and financial conditionsThe contents revealed a consensus on the potential for interest rate cuts this year and a cautious approach towards further reducing the balance sheet.

The overarching sentiment among most officials is that the policy interest rate may have peaked in the tightening cycle

Nearly all noted that if the economy evolves as they anticipate, it could be appropriate to enact a rate reduction sometime this yearThey acknowledged that the process of reducing inflation is likely to be uneven.

A persistent concern expressed by officials remains inflation itselfThe minutes highlighted their uncertainty regarding the durability of high inflation, with recent data failing to bolster confidence in inflation consistently declining to the 2% mark.

Some officials raised alarms about geopolitical risks potentially causing severe supply constraints or heightened transportation costs, which could lead to upward pressure on pricesThey noted how such developments could also hinder economic growth, with rising energy prices presenting inflationary risks amidst geopolitical turmoil or surges in domestic demand.

In addition, the meeting minutes indicated that certain economic activities in the U.S

are facing downward risks, such as a slowdown in major Asian economies, a deteriorating environment in the U.Scommercial real estate market, and the potential for renewed pressures in the banking sector.

Interestingly, the minutes revealed discussions among officials about the possibility of ending the balance sheet reductionThe Federal Reserve is currently unwinding its holdings of government bonds and mortgage-backed securities at a pace of up to $95 billion per month, a process known as quantitative tightening (QT).

Although most officials believe the QT process is proceeding smoothly, they have shown a general preference for caution due to the market disruptions observed in 2019. This prudence reflects a delicate balancing act the Fed must maintain in fostering economic recovery while ensuring financial stability.

The meeting minutes illustrate a consensus among officials to potentially halve the monthly pace of balance sheet reduction

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Their inclination is to adjust the scale of Treasury reductions over mortgage-backed securities to decelerate the QT process.

Following the release of the minutes, Nick Timiraos, a journalist often referred to as the "new Fed whisperer," published an article stating that the Federal Reserve is preparing to ease the pace of its balance sheet reductionHis piece was aptly titled “Fed Ready to ‘Soon’ Slow Reduction of $7.4 Trillion Portfolio.” He emphasized that officials previously allowed $60 billion of U.STreasuries to roll off automatically each month, a figure that may soon be reduced.

The repercussions of these developments have reverberated through the stock market.

On the announcement of the minutes, the major stock indices saw slight rebounds but still closed lower

The Dow dropped by 1.09%, the NASDAQ declined by 0.84%, and the S&P recorded a 0.95% decrease.

Most of the popular tech stocks witnessed declines, with companies like Tesla, Intel, Qualcomm, and AMD each dropping over 2%. Apple saw a decrease of more than 1%, while Nvidia managed an increase exceeding 2%. The real estate and regional banking sectors were particularly hard hit, with the S&P 500 real estate index experiencing its largest single-day drop since June 2022, plummeting by 4%. Meanwhile, shares of banks such as Silicon Valley Bank and New York Community Bank fell more than 8%.

Conversely, the oil and gas sector showed resilience, with Houston Energy climbing over 9%, alongside increases seen in companies like Petrobras and Empire Petroleum, which went up by more than 1%.

The March inflation data, which surpassed expectations, has significantly dampened the likelihood of rate cuts within the near term, leading financial analysts to recalibrate their forecasts.

Current market pricing for swap contracts shows that traders are now predicting the first rate cut to be pushed back from September to November, with expectations of only around 40 basis points of cuts anticipated within the year