Federal Reserve officials during their December policy meeting broached the subject of reducing interest rates, minutes from that meeting released Wednesday showed.
Officials’ latest economic projections released in December showed that they expect to cut rates this year for the first time since kicking off a historic inflation-busting campaign in March 2022.
The central bank has seen substantial progress since then: Inflation is currently running under 3%, as measured by the Fed’s preferred inflation gauge, well below a four-decade peak reached in the summer of 2022.
While some officials remained wary of upside risks to inflation during December’s meeting, according to the minutes, they also recognized that the Fed’s key interest rate is “likely at or near its peak for this tightening cycle.”
Fed officials “judged that the current stance of monetary policy was restrictive and appeared to be restraining economic activity and inflation,” but that “it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate,” the minutes said. Officials also saw it “appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee’s objective.”
Wall Street is eager for rate cuts, with some investors pricing in that first cut in the spring. However, officials have come out to temper that optimism, stressing that there are still risks that could sabotage inflation’s defeat.
Wednesday’s minutes showed that central bank officials want to see a consistent trend of easing price hikes before cutting rates. So far, investors have scoffed at any hawkish comments from officials indicating that additional rate increases remain on the table.
The proverbial final mile of the Fed’s war on inflation could be the most difficult, requiring a sustained period of “below-trend growth.” The US economy likely ended 2023 on a strong note, with real-time forecasts projecting fourth-quarter gross domestic product will register above 2% and employers likely added more than 100,000 jobs in December, according to FactSet estimates.
The state of inflation and its trajectory is the main deciding factor for cutting interest rates, but officials examine several other facets of the economy. The Fed’s favorite inflation measure — the Personal Consumption Expenditures price index — fell on a monthly basis in November for the first time in more than three years. The annual rate measured 2.6% in November, still above the 2% target, but a major improvement from the four-decade high of 7.1% in June 2022. The core reading, which excludes volatile food and energy prices, stood at 3.2% in November from a year earlier.
Officials also look at economic activity broadly, since strong growth could make the Fed’s job of taming inflation difficult. Officials acknowledged that gross domestic product, the broadest measure of economic output, “had slowed” since the summer.
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