Japan’s Inflation Hits Two-Year High, Strengthening BOJ’s Confidence in Next Rate Hike

Fed FOMC Minutes: Balance Sheet Reduction May Slowdown or End Sooner

The U.S. Federal Reserve released the minutes of the January FOMC meeting on February 19. The key highlights are as follows: More Data Needed to Support Inflation Decline Federal Reserve officials noted that while inflation in housing services remains elevated, it has been steadily declining, and core non-housing services inflation has shown a similar trend. Although core personal consumption expenditures (PCE) have recently increased due to a high base effect, a three- to nine-month annualized view suggests that inflation progress is more pronounced. However, some officials emphasized that further data may be needed to confirm that inflation has sustainably returned to the target range. Regarding the inflation outlook, factors such as slowing wage growth, stable long-term inflation expectations, and the continued restrictive stance of monetary policy are expected to exert downward pressure on inflation. However, some officials argued that the current interest rate level may not be significantly above the neutral rate. They also pointed out that recent changes in trade and immigration policies, along with strong consumer demand, could make the disinflation process less predictable. Some regional business contacts reported that firms are attempting to pass on tariff-related costs to consumers, and certain inflation expectation indicators have shown an upward trend. Nevertheless, the Fed still expects inflation to continue moving toward the 2% target, albeit with potential hurdles along the way. Two-sided risks balanced, inflation in focus On the labor market, officials generally agreed that labor conditions remain stable, with the unemployment rate at relatively low levels and job openings and quit rates holding steady. Most officials considered the risks to be broadly balanced, though some believed that the risks to price stability remain higher than those to achieving maximum employment. Officials widely recognized that changes in trade and immigration policies, geopolitical impacts on supply chains, and stronger-than-expected consumer spending could increase upside risks to inflation. Over the coming period, distinguishing whether inflation changes are driven by short-term volatility from new government policies or by long-term structural shifts will become increasingly challenging. Balance Sheet Reduction May Pause or End Sooner On the balance sheet reduction (QT) process, the System Open Market Account (SOMA) manager reported that the volume of overnight reverse repurchase agreements (ON RRP) has been steadily declining, but overall reserves remain adequate. However, the issue of the debt ceiling is likely to affect the assessment of reserve adequacy. Since fluctuations in the debt ceiling could significantly impact reserve levels, continuing QT under these conditions might cause reserves to fall below the Fed’s preferred level. Thus, considering a pause or slowdown in QT until the debt ceiling issue is resolved may be an appropriate course of action. Additionally, the SOMA manager outlined several potential scenarios for the conclusion of QT. Under each scenario, principal repayments from agency debt and agency mortgage-backed securities (MBS) would be reinvested into U.S. Treasuries. It is expected that the Fed’s future Treasury holdings will increasingly align with the overall maturity structure of government debt, meaning the proportion of Treasury bills held by the Fed will continue to rise over the coming years. Summary Overall, the minutes of this FOMC meeting indicate that recent economic and labor market resilience, new government policy changes, and inflationary pressures have led the Fed to place greater emphasis on inflation within its dual mandate of "price stability" and "maximum employment." More importantly, the Fed engaged in clearer discussions on potentially pausing or ending QT, which could alleviate market concerns over a sharp decline in liquidity should QT and debt ceiling negotiations unfold simultaneously.