Minutes from the Federal Reserve's December meeting revealed that a majority of officials believed further interest rate cuts would be appropriate if inflation continued to decline over time, as expected.
However, some officials explicitly stated that they believed interest rates should remain unchanged "for a period of time" following the December meeting.
The minutes from the December 9-10 Federal Open Market Committee (FOMC) meeting continued to reflect internal divisions within the central bank and the difficulty of the most recent policy decision.
The minutes stated, "Some officials who supported a rate cut at this meeting noted that the decision was made after careful consideration of trade-offs, and they could have supported keeping the target range unchanged."
Earlier this month, officials voted 9-3 to lower the benchmark interest rate by 25 basis points for the third consecutive time, bringing it to a range of 3.5%-3.75%. However, they made a subtle adjustment in the post-meeting statement, suggesting uncertainty among officials about the timing of the FOMC's next rate cut.
Even as the FOMC decided on a 25-basis-point cut, divisions among officials persisted. Governor Steven Milan opposed the 25-basis-point cut, advocating instead for a single 50-basis-point reduction. Meanwhile, Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid also dissented, favoring no change to the interest rate.
On Tuesday morning, prior to the release of the minutes, investors assigned a probability of less than 20% to an FOMC rate cut at its next meeting.
Federal funds futures contracts indicated that investors expect at least two 25-basis-point rate cuts over the coming year.
Divisions Deepen
The minutes continued to show significant disagreement among policymakers regarding whether inflation or unemployment poses the greater risk to the U.S. economy.
The minutes noted, "Most participants judged that moving toward a more neutral policy stance would help guard against the likelihood of a significant deterioration in labor market conditions."
Simultaneously, the minutes stated, "Some participants noted that elevated inflation could become entrenched, and that further reductions in the policy rate against a backdrop of still-high inflation readings might be misinterpreted as a weakening of the Committee's commitment to its 2 percent inflation goal."
Following the December meeting, Fed Chairman Jerome Powell told reporters that the Fed had lowered rates sufficiently to guard against a more serious deterioration in the labor market, while still maintaining pressure on inflation.
Due to a government shutdown that lasted throughout October and extended for nearly half of November, officials lacked the usual economic data at their disposal during the meeting. However, policymakers indicated that new data in the coming weeks could provide them with guidance.
The minutes stated, "Some participants who supported or could have supported maintaining the target range indicated that the substantial amount of data on the labor market and inflation to be released between the next two meetings would help them assess whether a rate cut was necessary."
Since that meeting, newly released data has not clearly resolved the internal disagreements at the Fed. The November unemployment rate rose to 4.6%, the highest level since 2021, while consumer price increases came in below expectations. Both data points strengthened the case for those supporting rate cuts.
However, the economy grew at an annualized rate of 4.3% in the third quarter, the fastest pace in two years, which likely intensified inflation concerns among officials who opposed the December rate cut.
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