The Fed's meeting minutes suggest that this round of rate hikes is over, and the timetable for rate cuts is still unclear

By Nick Timiraos

Compiled by: Mary Liu, BitpushNews

The minutes of the Federal Reserve's meeting from December 12 to 13, released early this morning Beijing time, showed that the Federal Reserve has completed this round of interest rate hikes, but did not reveal any meaningful debate on when to start lowering interest rates.

The minutes showed that while almost all officials expected the policy rate to eventually be cut by the end of this year, uncertainty was growing about how to approach the next monetary policy cycle.

Some policymakers grew uneasy about keeping interest rates too high for too long. They highlighted “downside risks to the economy that an overly restrictive stance could pose,” the minutes said. They noted that a slowdown in the labor market could “shift quickly from a gradual easing to a more abrupt downturn.”

Meanwhile, the minutes showed that other policymakers believed "circumstances might require maintaining the target interest rate at its current value for longer than they currently anticipate." Richmond Fed President Tom Barkin said in a speech on Wednesday that this might be necessary if inflation runs well above the Fed's 2% target.

The Fed held 12 policy meetings between March 2022 and July 2023, raising interest rates 11 times. Since then, as inflation has cooled, the committee has kept the benchmark federal funds rate in a range of 5.25% to 5.5%, a 22-year high.

Some confusion arose following a speech by Federal Reserve Chairman Jerome Powell on Dec. 13. Powell’s comments, along with economic projections released after the meeting, suggested the Fed’s next move was more likely to be a rate cut, even as the central bank maintained written guidance that officials were more focused on risks to the economy that warranted higher rates.

As a result, markets have increased bets on rate cuts this year, triggering a sharp rebound in stocks and bonds as 2023 draws to a close.

Investors expect the central bank to start cutting interest rates at its second policy meeting this year in March, with the Fed's next meeting on January 30-31.

Investors were reassured by the minutes, which showed that the Fed's rate hikes were working. The latest minutes did not mention the "unacceptably high" inflation that was mentioned in the previous version.

However, the minutes showed that officials could again be on high alert if markets rebounded too much from easing financial conditions, making it more difficult to slow the economy and keep inflation on a sustained basis.

The outlook for the U.S. economy has appeared to brighten in recent months as inflation and wage growth are slowing. If the economy weakens more than officials expect, that would give the Fed more room to cut interest rates quickly and could open the door to lower rates even if the expansion doesn’t stop.

A year ago, many economists expected Fed officials would have to raise interest rates to a level that creates enough slack — unemployed workers and idled factories — to significantly slow inflation. But the repair of supply chains and the influx of workers into the labor market are holding back wage and price increases without causing broad economic weakness.

The minutes provided little insight into how officials viewed the prospects for rate cuts. Officials viewed the risk of higher-than-expected inflation late last year as having receded, but they highlighted a debate over the extent to which expectations have improved.

Last month, some officials argued that the easy part of fighting inflation was already done as supply chains and labor markets have fully recovered from pandemic-related disruptions. That could require the Fed to keep interest rates higher than needed to dampen economic activity.

“After decades without pricing power, businesses — especially those facing profit pressures — won’t be willing to give up raising prices unless their customers or competitors force them to act,” Barkin said in a speech in Raleigh, North Carolina. “If that’s the case, I fear more must be done to reduce demand and convince price setters that the era of inflation is over.”

Others, however, see the potential for continued improvement on the supply side, which could prolong a relatively costless decline in inflation and raise the question of when to cut rates.

Federal Reserve officials are finding it increasingly difficult to head off market expectations for earlier and deeper rate cuts, largely because inflation is cooling faster than central bank policymakers expected.

Last month, Fed officials projected that core inflation, which excludes volatile food and energy prices, would end the year at 3.2%, down half a percentage point from three months ago. Data received during the Fed's meeting last month showed a continued decline in core inflation. It fell to 1.9% on a six-month annualized basis in November, according to the Commerce Department. The Fed's inflation target is 2%.

Powell's unsolicited comments sparked enthusiasm in the market as some officials at the Fed's policy meeting described their own outlook for rate cuts. In the days after the meeting, some officials pushed back against expectations of an imminent shift toward rate cuts through public remarks. Powell's top deputy, John Williams, president of the New York Fed and vice chairman of the Fed's rate-setting committee, later clarified that rate cuts were not the main focus of the policy meeting.

Analysts viewed Powell’s comments last month as notable because he was more concerned than before about the risk that too high interest rates at a time of falling inflation could cause unnecessary damage to the economy. “We are aware of the risk of holding on too long,” he said. “We are very focused on not making that mistake.”

Powell also reiterated his view that interest rates could be lowered next year as inflation is moving closer to the 2% target. Holding interest rates steady as inflation falls would lead to higher inflation-adjusted or "real" interest rates, something the Fed doesn't want to see. Policymakers can lower nominal interest rates just to prevent real interest rates from getting too tight.

Powell said: "We will not wait until inflation reaches 2% to cut interest rates, that would beXiaobai NavigationIt’s too late.

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