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Fed minutes display 'comfort' about labor market: Strategist

Federal Reserve officials are erring on the side of caution and feel uneasy about cutting interest rates too soon in 2024. This seems to be the main consensus from Fed regulators, according to the January FOMC meeting minutes released on Wednesday.

J.P. Morgan Asset Management Global Market Strategist Gabriela Santos sits down in-studio with Yahoo Finance to break down the top takeaways from the January Fed minutes, including what it may hint about the direction of rates.

"Reading the minutes, actually, yes, they're still vigilant around inflation risk. But if you look at the minutes, they showed a lot of comfort that the labor market was coming to better balance, so less concern about a wage-price spiral," Santos explains. "There was also much more comfort around rent coming down due to high-frequency indicators suggesting that."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- And Gabriela, we also got minutes from the Fed's last meeting, and that suggested our central bankers not in any big rush to cut rates. What are your expectations?

GABRIELA SANTOS: So I think I pulled up the minutes right before I came here because, and I always go to the participant section, because for us there wasn't going to be too much new information in terms of short term rates, especially because over the past two weeks. We've had a significant repricing. We went from expecting six rate cuts this year to now between 3 and four rate cuts, and they've gotten pushed back to June from March.

So I think what we saw in the minutes at this point became a bit stale. The market had already incorporated that, we're not seeing much of a reaction at all on the bond market. But I pulled it up to look much more the discussion on the balance sheet. An accelerated timeline than we expected has been suggested for winding down quantitative tightening. So far nothing much from the minutes, but that's going to be the big action point at the March meeting, and that's actually something that puts a lid on long end yields as you're getting more supply absorbed by the Central Bank.

- There have been a couple of voices, not many by any means, who have suggested we could even see another increase in rates because of the recent reads on inflation. Is that crazy to, to imagine that that could happen?

GABRIELA SANTOS: We think it would take a substantial re-acceleration in inflation. And reading the minutes, actually, yes they're still vigilant around inflation risk. But if you look at the minutes, they showed a lot of comfort that the labor market was coming to better balance, so less concern about a wage price spiral. There was also much more comfort around rent coming down due to high frequency indicators suggesting that.

And as Chair Powell said, really the inflation data doesn't need to get better, it just needs to maintain its trajectory, and they're really focused on the trend three months, six months. So of course, the next few CPI reports will be important, and that's why we think they'll wait to June, right, to be able to garner more of a trend. And by June, we actually think we'll be in a two handle with core CPI and hence open the door to cuts.

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