EconoFACTS

January 03, 2024 | 15:25

FOMC Minutes (Dec. 12-13) — Early Rate Cuts? Wait a Minutes!

Economist

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Michael Gregory , CFA

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Key takeaways from the FOMC’s policy pronouncements on December 13 included: further rate hikes were “not likely”, and, the Fed began discussing “when will it become appropriate to begin dialing back the amount of policy restraint in place”. Markets subsequently went to town on speculation for rate cuts as early as March, although some of the initial conviction has since faded. The Minutes from last month’s confab suggest it was correct to curb one’s enthusiasm.

Yes, rate cuts are on table for 2024, as they have been for some time, but there was no indication at all whether they were close at hand or whether some sort of timetable was being crafted. In discussing their projected rate reductions (with 17 of 19 participants projecting at least one, and 11 forecasting at least three), policymakers noted that “their outlooks were associated with an unusually elevated degree of uncertainty” and “it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate”. Several participants also noted that “circumstances might warrant keeping the target range at its current value for longer than they currently anticipated”.

Elsewhere, participants pointed to 2023’s reduction in inflation amid “growing signs of demand and supply coming into better balance in product and labor markets” as justifying why the policy rate was “likely at or near its peak for this tightening cycle”.

However, there was much more discussion surrounding the upside risks to the economic outlook than the downside risks. Apart from the usual candidates on both fronts, “many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for the Committee to reach its inflation goal”. Participants also noted some ‘not usual’ sources of upside inflation risk, “including possible effects on global energy and food prices of geopolitical developments, a potential rebound in core goods prices following the period of supply chain improvements, or the effects of nearshoring and onshoring activities on labor demand and inflation”.

On balance, participants emphasized “the importance of maintaining a careful and data-dependent approach to making monetary policy decisions”. And they “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee's objective”. Rate cuts are on policy table, and it seems the Fed is prepared to allow them to collect some dust first.