Most Federal Reserve officials wanted to keep borrowing costs high “for some time”, according to minutes of their meeting in December, adding to doubts that the US central bank is poised to begin cutting interest rates as early as March.
While officials expressed optimism that the Fed was quelling inflation, they were also careful not to commit to any immediate loosening of monetary policy, according to a record of the meeting published on Wednesday.
Rate-setters “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 [Federal Open Market] Committee’s objective”, the minutes showed.
Fed officials surprised markets in December by indicating they expected to make three quarter-point cuts over the course of 2024. Ahead of the meeting, their projections were expected to hint at two cuts.
However, the minutes suggested that those cuts were unlikely to come as soon as March, which many investors have bet on. While officials still viewed rates as “as likely at or near [their] peak”, they also saw “an unusually elevated degree of uncertainty” in this year’s economic outlook. That meant most FOMC members would want to see more evidence inflation was moving towards their 2 per cent goal before loosening monetary policy.
The account highlights the challenges facing the Fed as it tries to call time on a campaign of aggressive rate rises, without renouncing its commitment to keeping price pressures under control and risking damage to its inflation-fighting credentials.
“They’re not willing to say ‘we’ve won’,” said David Kelly, chief global strategist at JPMorgan Asset Management, referring to the Fed’s battle against inflation. The central bank’s officials appeared from the minutes to be a “rather gloomy, worried bunch”, he added.
Headline CPI inflation is now 2.6 per cent, with the six-month annualised core rate — Fed officials’ preferred measure of underlying price pressures — now just 1.9 per cent.
But Jeremy Schwartz, economist at Nomura, said the minutes showed “a lack of conviction” among Fed officials that they had conquered inflation. “That seems out of line with the early and rapid pace of cuts the market is currently pricing in.”
Despite their caution, policymakers acknowledged the outlook for inflation was “moving toward greater balance”. An earlier reference from previous minutes to inflation remaining “unacceptably high” was removed.
Investors appeared unsurprised by the account in the Federal Open Market Committee minutes. Yields on the US government’s benchmark 10-year bond were 0.04 percentage points lower at 3.91 per cent on Wednesday afternoon in New York, while the policy-sensitive two-year yield was flat at 4.32 per cent. Bond yields rise as their prices fall.
In equity markets, the S&P 500 maintained an earlier decline to trade 0.6 per cent lower on the day. The technology-heavy Nasdaq Composite index was down 1 per cent.
Futures markets continued to price in roughly six interest rate cuts for 2024 as a whole, despite the Fed’s official “dot plot” projections indicating just three cuts.
The publication of the minutes comes as Fed watchers continue to debate when the bank will begin lowering borrowing costs in 2024 and how deeply it will cut rates through the year.
“So long as the economy remains strong, or solid, they will, I think, remain on the sidelines,” said Kelly. “A first cut in June is my reading of their summary of economic projections.”
The dovish tone of the December meeting and chair Jay Powell’s comments immediately after it led many investors to bet that cuts could start as soon as the vote in mid-March.
FOMC officials have warned since the meeting that a move to slash rates was far from a done deal, however.
“The pushback from Fed officials has been somewhat tepid. Nobody has come out and said ‘we won’t cut in March’. But the suggestion that the market pricing is a little bit aggressive is out there,” said Andrew Hollenhorst, economist at Citi. “And that’s consistent with what we’ve seen in the minutes today.”
On Wednesday, Richmond Fed president Thomas Barkin, a voting member of the FOMC this year, warned that the quest to beat back inflation was not complete, saying that some companies did not yet “want to back down from raising prices until their customers or competitors force their hands”.
“If that’s the case, I fear more will have to happen on the demand side, whether organically or through Fed action, to convince price-setters that the inflation era is over,” he said, adding that a soft landing was “increasingly conceivable” but “in no way inevitable”.
Barkin’s comments pushed yields on 10-year Treasuries above 4 per cent for the first time since the December meeting, although the move had largely reversed by midday in New York.
Bond prices have started 2024 on the back foot following a strong year-end rally that pushed the benchmark 10-year yield as low as 3.78 per cent last week, spurred by the Fed’s unexpectedly dovish tone at the meeting.
On Wednesday, federal data showing that job openings in November fell to the lowest level in more than two years offered some evidence of cooling in the labour market, bolstering expectations of rate cuts.
December’s decision from the central bank left the federal funds rate at 5.25 per cent to 5.5 per cent — a 22-year high.
Policymakers’ delay in responding to the surge in inflation in 2021 and 2022 dented the Fed’s reputation, prompting a series of four successive 75 basis point rises in interest rates. In total, the Fed raised rates by 525 basis points over 2022 and 2023.
However, price pressures declined sharply during the second half of last year and the Fed has not raised rates since July.
The resilience of the US economy last year, as inflation fell despite strong growth and low unemployment, has raised hopes of a soft landing.
The FOMC’s December projections showed most officials expected rates would end 2024 between 4.5 per cent and 4.75 per cent. Most officials expect rates to fall farther in 2025, ending the year between 3.5 per cent and 3.75 per cent.
Those dot-plot projections are built on the core Personal Consumption Expenditures index falling to 2.4 per cent this year and 2.2 per cent in 2025, before hitting the central bank’s 2 per cent goal in 2026. Unemployment is expected to tick up only slightly, from 3.8 per cent now to 4.1 per cent.
Additional reporting by Jennifer Hughes in New York
