Federal Reserve officials concluded in December that interest rate cuts were likely in 2024, although they appeared to offer little indication of when that might happen, according to minutes of the meeting released Wednesday.
At the meeting, the Federal Open Market Committee agreed to keep the key interest rate in a range between 5.25% and 5.5%. Members said they expect cuts of three-quarters of a percentage point by the end of 2024.
However, the meeting summary noted a high level of uncertainty about how and whether this will happen.
“When discussing the monetary policy outlook, participants assumed that the policy rate is likely to peak or near its peak in this tightening cycle, but noted that the actual policy stance will depend on how the economy performs,” it says in the minutes.
Officials noted the progress made in fighting inflation. They said supply chain factors that contributed significantly to a surge that peaked in mid-2022 appear to have abated. In addition, they pointed to progress in improving balance in the labor market, although this is still a work in progress.
The dot plot of individual members' expectations released after the meeting showed that participants expect cuts over the next three years that will bring the federal funds rate back close to the long-term range of 2%.
“In their submitted forecasts, almost all participants indicated that, given improvements in their inflation outlook, their baseline forecasts implied that a lower target range for the federal funds rate through the end of 2024 would be appropriate,” the document said.
However, the minutes noted an “unusually high level of uncertainty” about the political course. Several members said it may be necessary to keep the key interest rate at elevated levels if inflation does not cooperate, and others pointed to the possibility of further increases depending on how conditions develop.
“Participants generally emphasized the importance of maintaining a careful and data-dependent approach to monetary policy decisions and reiterated that it is appropriate for monetary policy to remain on a restrictive path for a period until inflation is clearly moving in a sustainable direction the goal of the committee. ” it says in the minutes.
Despite Fed officials' cautious tone, markets expect the central bank to make sharp interest rate cuts in 2024.
Fed funds futures trading points to six quarter-point cuts this year, increasing the Fed funds rate, which primarily determines what banks charge each other for overnight loans but also influences several consumer debt products a range between 3.75 and 4% would fall. .
Earlier Wednesday, Richmond Fed President Thomas Barkin also expressed caution about policy, noting the numerous risks associated with trying to guide the economy to a soft landing.
The minutes showed that “significant progress” had been made in tackling inflation, with a six-month measure of personal consumption spending even indicating that the inflation rate had fallen just below the Fed's 2 percent target.
However, the document also noted that progress was “uneven” across sectors, with energy and core goods declining but core services still increasing.
Officials also addressed the Fed's efforts to reduce bond holdings on its balance sheet. The central bank saved about $1.2 trillion by letting maturing proceeds flow out instead of reinvesting them as usual.
Several FOMC members said it would likely be appropriate to wind down the process if bank reserves are “somewhat above the level considered sufficient.” Those officials said discussions would begin well before the trial was halted so that the public would be aware of it in a timely manner.
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