Can there be any more rate cut expectations? Tonight's FOMC meeting minutes are very important

The signal of rekindled inflation is becoming stronger, with Wall Street investment banks taking turns to "pour cold water" on this year's interest rate cut expectations ahead of the heavyweight CPI report. Bridgewater warns that the Fed's interest rate cut expectations have "gone off track", JPMorgan Chase claims to be prepared for the Fed to raise interest rates to 8%.

In addition, tonight's release of the FOMC meeting minutes will be a key force shaping interest rate cut expectations. The Fed has always liked to use meeting minutes to signal to the market, so the market is always vigilant about this.

Looking back at the March policy meeting, after maintaining interest rates unchanged for the fifth consecutive time, the Fed also maintained its benchmark forecast of three interest rate cuts this year. The Fed Chairman expressed a dovish stance at the post-meeting press conference. It is worth noting that the dot plot shows a clear internal divergence within the Fed on the number of interest rate cuts this year. Coupled with recent hawkish signals from many senior officials, the degree of internal divergence within the Fed on interest rate cuts will be the highlight of the March meeting minutes.

The March FOMC meeting minutes will be released at 2:00 p.m. Eastern Time on Wednesday (2:00 a.m. Thursday Beijing Time). Here are four key questions compiled by Wall Street News.

How divided is the Fed internally on interest rate cuts?

There is a clear internal division within the Fed on interest rate cuts this year: although Powell has been leaning dovish, many recent comments from Fed officials have taken the opposite direction.

Richard Moody, Chief Economist at the Richmond Fed, said it is worth carefully studying the meeting minutes to see if the attitudes of FOMC members are stronger than Powell's statements at the press conference.

The market is also paying attention to this, wondering if Powell will push for an interest rate cut in June despite opposition.

According to Stephen Englander, Head of Research at Standard Chartered Bank, at the March press conference, Powell seemed to suggest that he would accept dissenting views.

Powell said at the press conference: "We are indeed trying to reach a consensus, ideally unanimity; there are members who express dissent, and that's okay. But life goes on, it's not a problem."

When will the Fed slow down the pace of tapering asset purchases?

Powell also stated at the March press conference that the general view of the Fed's rate-setting committee is that the pace of tapering asset purchases should be slowed down "fairly soon."

He emphasized that no final decisions have been made by the Fed, and analysts believe these decisions may be made at the next policy meeting in early May.

Derek Holt, Vice President of Scotiabank Economics, said, "Fairly soon" could mean as early as June. **

The Details of Quantitative Tightening Are Also Important

Currently, the Federal Reserve is still reducing its balance sheet at a pace of $95 billion per month, including $60 billion in maturing Treasury securities and $35 billion in maturing mortgage-backed securities (MBS).

Analysts believe that the minutes of this meeting will provide detailed information on the gradual reduction plan, as well as discussions on the maturity and composition of the balance sheet.

Nomura Securities economists expect the Federal Reserve to plan to halve the monthly reduction in Treasury purchases to $30 billion, while keeping the size of maturing MBS unchanged.

How to End Quantitative Tightening Without Triggering a Liquidity Crisis?

Looking back at history, in 2019, due to a shortage of liquidity causing turmoil in the money markets, the Federal Reserve had to hit the brakes and terminate its first quantitative easing program. The Federal Reserve hopes to end this plan without causing any crisis, but there is no consensus on when to stop.

Dallas Fed President and head of open market operations, Kaplan, stated that slowing down the pace of quantitative tightening "will reallocate liquidity to banks and money market participants and provide more time for the FOMC to assess liquidity conditions. This will also reduce the risk of overdoing it."

Analysts currently have differing views on how long quantitative tightening will last and how far it will go. Many believe the Federal Reserve will end it by the end of 2024, but some think it will continue into 2025.

Goldman Sachs expects that the Federal Reserve's quantitative tightening plan will continue until March 2025, by which time the size of the balance sheet will be around $6.7 trillion. Currently, the assets on the Federal Reserve's balance sheet are around $7.5 trillion