20 February 2025
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Fed minutes show officials favour a careful approach

Daily Outlook - 20 February 2025

By Daniel Richards

The minutes from the FOMC meeting held at the close of January showed that members supported a ‘careful’ approach to any further rate cuts, and that ‘provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.’ With the economy still strong and inflation elevated, many members felt that rates could be held at a restrictive rate, though others cautioned that ‘policy could be eased if labor market conditions deteriorated…’ While members expect inflation to continue moving towards target, its path is expected to be uneven, and it was noted that businesses may pass on any higher costs related to tariffs to consumers and that immigration policies might also prove inflationary. The minutes also showed a discussion around easing off on quantitative tightening while issues around the debt ceiling are unresolved.

UK CPI inflation accelerated to 3.0% y/y in January, up from 2.5% in December and hotter than the predicted 2.8%. This marked the fastest pace of annual price growth since last March. Prices were 0.1% lower in January compared to the previous month but this was slighter than the expected 0.3% fall in prices. Core inflation was in line with expectations at 3.7% y/y, up from 3.2% the previous month, while services inflation was at 5.0%, up from 4.4% previously, driving the uptick in headline price growth. This was on the back of the introduction of VAT on private school fees and also volatile moves in the cost of airfares. Following on from the robust labour market data published the previous day, the CPI print will likely keep the BoE on the cautious side when it comes to its rate-cutting path as inflation is set to remain some distance from the target rate of 2.0% for some time.

Today’s Economic Data and Events

17:30 US initial jobless claims, week to February 15. Forecast: 215,000

Egypt overnight deposit rate. Forecast: 27.5%

Fixed Income

  • US treasuries rallied yesterday, likely boosted by Fed discussions around slowing quantitative tightening. Yields on the 2yr fell 4bps to 4.2676% while the 10yr yield ended the day 2bps lower at 4.5327%.

FX

  • The dollar index closed up for a second day, adding 0.1% against its basket of peers. Gains came against most of the majors, with GBP losing 0.2% to close at 1.2586 while EUR closed at 1.0423, also down 0.2%.
  • CAD was the worst-performing of the commodity currencies as it lost 0.3% to close at 1.4234, while AUD fell 0.1% to 0.6344.
  • By contrast, JPY gained 0.4% against the dollar to close at 151.47, boosted by some hawkish commentary by BoJ officials.

Equities

  • Equity markets brushed off the cautious language around rate cuts from the FOMC minutes, with the S&P 500 closing at a new record high yesterday as it added 0.2%. The Dow Jones also closed 0.2% higher while the NASDAQ added 0.1%, with a rally in chipmakers contributing to the gains.
  • European markets were less positive as the CAC fell 1.2% and the DAX 1.8%.
  • Locally, the DFM closed up 0.3% while the ADX fell 0.3%. Saudi Arabia’s Tadawul closed 0.1% lower.

Commodities

  • Oil prices gained for the third day running on Wednesday as Brent futures added 0.3% to USD 76.0/b. WTI trading was closed on Monday but it has also risen this week with a 1.6% gain on Tuesday as markets reopened and a further 0.6% yesterday taking it up to USD 72.3/b.
  • The API has reported that US crude inventories rose by 3.3mn bbl last week, marking the fourth consecutive week of stockpile build.

Written By

Daniel Richards Senior Economist


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