The Federal Reserve (Fed) of the United States announced three times at the December FOMC meeting that it would stop raising interest rates. The minutes of the December meeting, released today, showed that officials believed that the current round of interest rate hikes may have reached its “peak”, but they will maintain interest rates at a high level for a period of time to fully combat inflation. In addition, officials also expect three interest rate cuts this year, but the current policy path remains highly uncertain.
Background:
Wall Street Fantasy Script: 2024 “Economic Mild Recession” followed by interest rate cuts, the war against inflation has been won.
The Fed, at its December FOMC meeting last year, announced a third consecutive pause in interest rate hikes, keeping the federal benchmark rate unchanged in the range of 5.25% to 5.50%. Fed Chairman Powell also stated in a post-meeting statement that this round of the most aggressive interest rate hiking cycle in decades, which began in March 2022, may have already reached or is close to its end. The futures market even optimistically expected the Fed to start six interest rate cuts within 2024, starting from March.
However, the minutes of the December meeting, 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 policy rates may have reached or were close to the peak of the current monetary tightening cycle, they still emphasized that:
Further reading:
BlackRock warns: Market’s estimate of interest rate cuts in March is “too optimistic”; Fed’s Daly says interest rates need to be reduced by three basis points next year.
Officials expect to cut rates by three basis points in 2024, but the path is highly uncertain.
The minutes of the December meeting also indicated that Fed officials believed there had been significant progress in combating inflation, especially as reflected in the six-month Personal Consumption Expenditures (PCE) index, which showed an annualized inflation rate of only 1.9%, below the Fed’s target of 2%. In addition, the tightness in the supply chain has eased and the labor market is also balancing.
If this trend continues, officials believe that interest rate cuts could be initiated within 2024, but they did not disclose the specific timing of the rate cuts. The minutes stated:
According to the dot plot, most officials expect to cut rates by three basis points in 2024, with rates falling to a range of 4.5% to 4.75% by the end of this year. Participants also expect four more rate cuts in 2025, with rates falling to a range of 3.5% to 3.75% by the end of that year.
However, the minutes also pointed out that there was “unusual uncertainty” regarding the policy path. Some officials indicated 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 rate hikes may still be possible.
Fed Dot Plot
Market bets on Fed starting rate cuts in March
The minutes of the December FOMC meeting show that officials seem to have a conservative attitude towards interest rate cuts. Both David Kelly, Chief Global Strategist at J.P. Morgan, and Jeremy Schwartz, an economist at Nomura Securities, have stated that from the meeting minutes, central bank officials “lack confidence” in announcing victory over inflation. Kelly predicts that the Fed will begin its first rate cut in June.
However, some experts still believe that the Fed will start 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 minutes that would prevent us from believing that the Fed will start cutting rates from March of this year.”
According to the data from the CME Fed Watch tool, the probability of the Fed maintaining interest rates unchanged at its FOMC meeting on January 30-31 is as high as 91.2%. At the next meeting in March, the probability of a 1 basis point rate cut exceeds 66.5%, while the probability of another pause in rate hikes is 27.4%.
Source: CME Fed Watch
Related Reports
Fed officials casually mention “rate cuts starting in the fall of 2024”! New York Fed President pours cold water: it’s too early to talk about it now.
The bull market has collected “6 big fuels”: interest rate cuts in the United States in 2024, Bitcoin, Ethereum narrative, encrypted AI…
US bond yield plummets to 4.13%, “bottom feeders” profit, interest rate cuts by the Fed in 2024?
Printing presses activated! Number of central banks implementing rate cuts surpasses rate hikes globally, will the Fed be next?