The minutes from the Federal Reserve's most recent policy meeting show that Fed officials generally support a cautious approach to future rate cuts, as long as the economy remains robust and inflation continues to cool slowly.
According to the minutes from the Federal Open Market Committee (FOMC) meeting that ended on November 7, "Participants expect that if the data is roughly in line with expectations, inflation continues to decline to 2%, and the economy remains near maximum employment, then gradually shifting towards a more neutral policy stance over time may be appropriate."
Earlier this month, the Fed lowered the benchmark interest rate by 25 basis points to a range of 4.5%-4.75%. Prior to this, the Fed had cut the benchmark rate by 50 basis points in September, a larger reduction than usual.
Fed Chairman Powell stated earlier this month that the economy has not sent signals indicating that decision-makers need to rush to cut rates. Fed officials will hold their last policy meeting of the year on December 17-18.
The minutes from the November meeting indicate that some officials stated that if inflation continues to rise, the Fed may pause rate cuts and maintain borrowing costs at a restrictive level. Some officials pointed out that if the economy or labor market worsens, rate cuts could be accelerated.
Policymakers also pointed out that the ambiguity of the so-called neutral interest rate (the policy level that neither restricts nor stimulates economic growth) is another reason for caution.
According to the minutes, many officials stated that uncertainty "complicates the assessment of the degree of monetary policy constraints, and they believe that gradually reducing policy constraints is appropriate." Over the past year, officials' estimates of the neutral interest rate have steadily increased, but it remains unclear how far the rates are from this level.
The November meeting took place after Trump was re-elected. Trump proposed new tariffs, tax cuts, and large-scale deportations, and economists believe these policies could put upward pressure on inflation.
Fed mouthpiece: The Fed's meeting minutes suggest that if inflation stalls, rate cuts will become cautious.
"Fed mouthpiece" Nick Timiraos reported that Fed officials discussed the possibility of slowing or pausing rate cuts if progress in reducing inflation stalls at a meeting earlier this month. According to the minutes released on Tuesday, officials believe that if economic performance aligns with their expectations—namely, that inflation will continue to decline steadily—then "gradually moving toward a more neutral interest rate setting may be appropriate." The minutes show that all 19 officials involved in the discussions agreed to lower the Fed's benchmark short-term interest rate by 25 basis points. Some policymakers believe that the risks of a more pronounced slowdown in the labor market or economy have diminished since the September meeting.
Many of them also stated that there is greater uncertainty about where to set interest rates for an economy that neither needs stimulus nor monetary restraint. The minutes state that these considerations "make it appropriate to gradually reduce policy constraints."
The Fed is considering aligning the management rate down by 5 basis points to the lower bound of the benchmark rate.
The minutes indicate that some Fed decision-makers believe that the overnight reverse repo rate (ONRRP) may soon be lowered again to align with the lower bound of the policy rate range. The overnight reverse repo rate is one of the two technical loan rates the Fed uses to manage the stability of the federal funds rate corridor, with the current rate at 4.55%, while the benchmark rate range is 4.5%-4.75%. Eliminating the 5 basis point spread between the overnight reverse repo rate and the lower bound of the monetary policy rate would slightly reduce the attractiveness of the reverse repo tool, which is widely viewed as an alternative indicator of excess liquidity. The scale of this tool has declined from a peak of $2.6 trillion at the end of 2022 to less than $150 billion this week.
Some Fed officials believe that "the committee will need to consider a technical adjustment to the overnight reverse repurchase agreement rate in future meetings," bringing it back in line with the lower bound of the policy rate range. Citigroup analysts stated that proposing this idea in November indicates that it may occur in December or January, "which would drive more cash out of the reverse repo mechanism."
The labor market is robust, and the outlook still aligns with long-term goals.
The minutes indicate that when discussing labor market developments, participants generally believe that recent data aligns well with a robust labor market condition, although strikes and devastating hurricanes are significant sources of temporary volatility in employment data. However, participants generally noted no signs of a rapid deterioration in labor market conditions, with layoffs still being rare. Regarding the outlook for the labor market, some participants observed that assessing potential trends in labor market developments remains challenging because the impact of immigration on labor supply is difficult to measure, data revisions, and the effects of natural disasters and strikes further complicate this assessment. Overall, participants generally believe that the current labor market condition is broadly consistent with the committee's long-term goal of achieving full employment.
Staff slightly raised the inflation forecast for this year.
The minutes indicate that at the November meeting, staff forecasts suggested that economic conditions would remain robust, and staff raised their assessment of potential output growth. On inflation, staff's inflation forecast for 2024 is slightly higher than the previous meeting's forecast, reflecting recent data. Subsequently, the outlook remains similar to previous forecasts: as supply and demand in labor and product markets continue to trend towards better balance, overall personal consumption expenditure price inflation and core personal consumption expenditure price inflation are expected to decline further, reaching 2% for both overall and core inflation by 2026.
The U.S. short-term financing market is stable, and household balance sheets are robust.
The minutes indicate that the condition of the short-term financing market in the U.S. remained generally stable during the interval between the two meetings. In terms of the stock market, despite rising U.S. Treasury yields, overall stock price indices saw significant increases during the interval between the two meetings due to increased confidence in growth prospects and corporate earnings reports slightly exceeding expectations. However, credit availability remains relatively tight for smaller businesses, although household balance sheets remain generally robust, as total household net worth remains high and mortgage delinquency rates continue to be low. Staff overall continues to believe that vulnerabilities in the U.S. financial system are significant, as evidenced by high asset valuation pressures. However, estimates of risk premiums in key markets remain low by historical standards.
The domestic economy is growing steadily, and there are signs of improvement in the foreign economy.
The minutes indicate that so far this year, real GDP has achieved robust growth. Since the beginning of the year, the pace of job creation has slowed, and the unemployment rate has generally increased, though it remains low. Consumer price inflation has significantly receded compared to the same period last year. Recent data indicates that labor market conditions remain robust. The average number of non-farm jobs added per month in the third quarter was similar to that of the second quarter. Job growth in October was significantly hampered due to strikes and hurricanes. Real GDP growth in foreign economies also picked up in the third quarter, particularly in the euro area and Mexico.
Article reposted from: Jin Shi Data.
