Fed minutes revealed caution about lowering rates too quickly

Today, market participants were able to gain more insight into the inner thinking of the Federal Reserve officials through the release of the minutes from last month’s FOMC meeting. The document revealed that they changed the wording in the post-meeting statement to indicate that no cuts would be coming until Fed officials held “greater confidence” that inflation was receding.

The summary contained in the minutes overwhelmingly indicated a sense of optimism and accomplishment that the recent restrictive monetary policy by the Fed had in lowering inflation. However, the minutes reinforced that members still stress the importance of timing and the “risks of moving too quickly” on interest rate cuts.

 The ancient Chinese philosopher Lao Tzu is responsible for saying, "Nature does not hurry, yet everything is accomplished". 

One interpretation of this quote is that you must embrace the process. You must understand that some things take time and can’t be rushed. In many ways, this is what Federal Reserve officials have been expressing about having “greater confidence” before implementing the first interest rate cut. 

The minutes reinforced the resolve of the Fed to have more evidence that inflation is trending lower before they cut rates. The minutes also revealed that Fed officials are not expecting further rate hikes.

In essence, the Fed is choosing to err on the side of caution and continues to feel uneasy about cutting rates too soon.

The minutes also revealed that officials were getting ready for a larger discussion regarding the central bank’s balance sheet. They underscored the need to continue reducing assets to take the balance sheet to the lowest value before its size is restrictive. 

At its height the central bank’s balance sheet was more than $9 trillion, however, there are reduction efforts that have reduced that amount by approximately $1.3 trillion since QT started in June 2022. Documents by the Federal Reserve indicated that as of September 27, 2023, the Fed’s balance sheet contained approximately 8 trillion in assets.

Gold futures had three consecutive days of higher highs, lows, and higher closes until today. As of 5:25 PM ET, gold futures basis most active April contract is fixed at $2034.30 after factoring in today’s decline of $5.50. Today’s price decline was fractionally aided by a slightly lower dollar which declined by 0.07% taking the dollar index to 104.009.

On a technical basis, yesterday’s highest value of approximately $2043, took it to the former support trend line created from a series of higher lows from December to current pricing. After the large price decline that occurred immediately following last week’s CPI inflation report for January, gold prices broke below that support line, which is now an excellent indicator of current resistance. Today, gold traded to a high of $2043.50, testing that resistance level for the second time and then closing well below it. This increases the probability of a further shallow price decline in gold futures. If this assumption is correct, gold could trade until it finds support at $2025, major support at $2014.

Wishing you as always good trading,