The Federal Reserve (Fed) of the United States announced three times at the December FOMC meeting to stop raising interest rates. The minutes of the December meeting released today showed that officials said that this round of interest rates may have reached a “peak,” but they will maintain high interest rates for a period of time to fully resist inflation. In addition, officials also expect three interest rate cuts this year, but the current policy path remains highly uncertain.
The Fed suspended interest rate hikes for the third time at the December FOMC meeting last year, keeping the federal benchmark interest rate unchanged at 5.25% to 5.50%. At the time, Fed Chairman Powell also stated in a post-meeting statement that this round of the most aggressive interest rate hike cycle in decades, which started in March 2022, may have ended or is nearing its end. The futures market even optimistically expected the Fed to start the six interest rate cuts in 2024 from March.
However, the minutes of the December meeting, which were released today, seemed to pour cold water on the market’s aggressive expectations for interest rate cuts. According to reports from the Financial Times and Bloomberg, the minutes showed that although most Fed officials believed last month that the policy interest rate may have reached or approached the peak of this round of monetary tightening cycle, they still emphasized that there is still a high degree of uncertainty:
Further reading:
BlackRock warns that the market’s forecast of interest rate cuts in March is “too optimistic”; Fed’s Daly says interest rates need to be cut by three digits next year
Officials expect a three-digit interest rate cut in 2024, but the path is highly uncertain.
The minutes of the December meeting also indicated that Fed officials believe that the mission to combat inflation has made significant progress, especially as the six-month personal consumption expenditure (PCE) showed an annualized inflation rate of only 1.9%, which is lower than the Fed’s 2% target. In addition, the state of supply chain tension has eased, and the labor market is also balancing.
If this trend continues, officials believe that it is possible to start cutting interest rates in 2024, but they did not disclose the specific timing of the interest rate cut. The minutes of the meeting stated:
According to the dot plot, most officials expect a three-digit interest rate cut in 2024, with the year-end interest rate falling in the range of 4.5% to 4.75%. Participants also expect four interest rate cuts in 2025, with the year-end interest rate falling to the range of 3.5% to 3.75%.
However, the minutes also pointed out that the “unusual high uncertainty” of the policy path. Some officials said that if the inflation rate does not cooperate in declining, it may be necessary to keep interest rates at a higher level, while other members pointed out that depending on the development of the situation, further interest rate hikes are still possible.
Fed dot plot
Market bets on the Fed starting interest rate cuts in March
The minutes of the December FOMC meeting of the Fed showed that officials seemed to be conservative in their attitude towards interest rate cuts. David Kelly, Chief Global Strategist at JPMorgan, and Jeremy Schwartz, an economist at Nomura Securities, both expressed that based on the meeting records, central bank officials “lack confidence” in announcing victory over inflation. Kelly predicted that the Fed will start the first interest rate cut in June.
However, some experts still believe that the Fed will start interest rate cuts as expected by the futures market, starting in March. Paul Ashworth, Chief North American Economist at Capital Economics, said, “There is nothing in these meeting minutes that can prevent us from believing that the Fed will start cutting interest rates from March this year.”
The Fed Watch tool data from the Chicago Mercantile Exchange (CME) shows that the probability of the Fed maintaining interest rates unchanged for the fourth time at the FOMC meeting to be held on January 30 and 31 is as high as 91.2%. At the next meeting in March, the probability of a 1-digit interest rate cut exceeds 66.5%, while the probability of another pause in interest rate hikes is 27.4%.
Source: CME Fed Watch
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