MNI: Fed Minutes Make No Mention Of Rate Cut Debate

Minutes from the Federal Reserve’s December meeting released Wednesday did not mention any discussion about reducing interest rates later this year even though policymakers penciled in a median three rate cuts for 2024 in their quarterly projections.

“In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024,” the minutes said.  

The Fed left interest rates on hold at a 22-year high of 5.25%-5.5% last month, and offered the strongest indication to date that it was likely done raising rates for this cycle. 

“Members generally viewed the addition of the word 'any' to this sentence as appropriately relaying their judgment that the target range for the federal funds rate was likely now at or near its peak for this policy tightening cycle while leaving open the possibility of further increases in the target range if these were warranted,” the minutes said in reference to the statement's new language on forward guidance. 

Fed Chair Jerome Powell acknowledged at his press conference that "the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that, that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today."

That and other dovish signals from the central bank led to a rally in risk assets that saw investors pricing in as many as six interest rate cuts from the Fed in 2024, three more than officials penciled in for the year in their Summary of Economic Projections. 

U.S. inflation has been coming down rapidly, having peaked above 9% in mid-2022 and since tumbling to around 3%. This has underpinned the Fed's dovish tilt and raised hopes of a soft landing for the economy, which Richmond Fed President Thomas Barkin said Wednesday is "increasingly conceivable but in no way inevitable."

Still, there are fears that the disinflation trend could stall, particularly if tensions in the Middle East escalate and raise the risk of another round of crippling supply disruptions. As of December, Fed officials on median saw core PCE inflation closing out 2024 at 2.4%, falling to 2.2% by the end of 2025 and finally hitting the 2% goal in 2026.

“Participants saw upside risks to inflation as having diminished but noted that inflation was still well above the Committee’s longer-run goal and that a risk remained that progress toward price stability would stall,” the minutes said.