Fed Minutes Stress Inflation Vigilance, Push Back Earlier Rate Cut Moves: Officials Flag Commercial Real Estate Risks

BY Benzinga | ECONOMIC | 02/21/24 02:18 PM EST

The minutes from the latest Federal Open Market Committee (FOMC) meeting underscored the Federal Reserve’s commitment to await more concrete evidence of a disinflationary trend before contemplating interest rate reductions.

According to the Fed statement, the FOMC emphasized that it anticipates maintaining interest rates steady “until it has gained greater confidence that inflation is moving sustainably toward 2%.”

According to the minutes, most participants “noted the risks of moving too quickly to ease the stance of policy” and underscored “the importance of carefully assessing incoming data” to determine if inflation is on a sustainable path back to 2%.

Several participants voiced concerns over financial conditions potentially becoming “less restrictive than appropriate,” which could undesirably accelerate aggregate demand and stall inflation reduction efforts.

The discussion also highlighted “other sources of upside risks to inflation,” including potential supply chain disruptions due to geopolitical events, a rebound in core goods prices as effects from supply-side improvements fade, or continued high wage growth.

It was agreed that the future trajectory of the policy rate would hinge on “incoming data, the evolving outlook, and the balance of risks.”

Minutes Highlight Downside Risks, Particularly In CRE Sector

However, the minutes also exposed a slight split within the committee. A few participants pointed out “downside risks to the economy” linked to maintaining a highly restrictive policy stance for an extended duration.

A noteworthy point in the minutes was the staff’s update on the stability of the U.S. financial system, which was described as having “notable financial vulnerabilities.”

Specifically, it was mentioned that Commercial Real Estate (CRE) prices were in decline, particularly in the multifamily and office spaces, with the low transaction volume in the office sector suggesting that “prices had not yet fully reflected the sector's weaker fundamentals.”

Market Reactions: Initial market reactions saw Treasury yields rising to session highs, with the 10-year yield moving to 4.32% and the 2-year yield jumping to 4.66%. Bonds, as tracked by the iShares 20+ Year Treasury Bond ETF fell further for the session, reaching lows last seen in early December 2023.

Volatility in equities saw an uptick, with the CBOE Volatility Index, or VIX, up 4%. The tech-heavy Invesco QQQ Trust was down 0.8%, underperforming the broader SPDR S&P 500 ETF Trust (SPY) , down 0.4%.

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Photo: Federal Reserve

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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