Fed FOMC Minutes: Majority of Officials Support Gradual Rate Cuts

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The Federal Reserve released the minutes of its November FOMC meeting on November 26. The key highlights are as follows:

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Inflation

Fed officials noted that the growth rate of core goods and non-housing services inflation has returned to earlier stable levels. However, the growth in housing services prices remains elevated, although it is expected to decelerate eventually as new lease rent inflation continues to slow.
Officials remain confident that inflation will return to the 2% target, though they emphasized that the process could take longer than anticipated.

Labor Market

Fed officials generally believe that the labor market remains stable, with declining job openings and quit rates aligning with a cooling in labor demand. There are no signs of rapid deterioration in the labor market, as most firms are managing workforce reductions through attrition rather than layoffs.
While the risk of significant labor market cooling has diminished compared to the September meeting, some officials still see higher risks of labor market deterioration.

Monetary Policy

Fed officials suggested that a gradual shift toward a more neutral policy stance could be appropriate if inflation and employment data align with expectations. They reiterated that monetary policy decisions remain data-dependent and are subject to a balanced assessment of two-way risks to the economic outlook.
Additionally, several officials noted the uncertainty surrounding the neutral rate, which complicates the evaluation of monetary policy restrictiveness. They argued that gradually reducing policy restrictiveness is reasonable under these circumstances.

Others

According to Fed surveys, the market expects the balance sheet runoff to end around May 2025, with about two-thirds of respondents projecting the conclusion to occur in the first or second quarter of 2025.

Fed staff highlighted two critical considerations in managing the balance sheet:

1. A 5 basis point cut to the ON RRP rate, bringing it closer to the lower bound of the federal funds rate, could exert downward pressure on other money market rates.
2. The suspension of the debt ceiling is set to expire in 2025. During this process, the Treasury General Account (TGA) balance may initially decrease, increasing reserves and ON RRP balances. However, when the debt ceiling is reinstated and the TGA is rebuilt, reserves and ON RRP balances could experience the opposite effect. These significant fluctuations could pose challenges to assessing the progress of the balance sheet runoff.

Conclusion

Overall, the Fed maintained its view of unchanged upside risks to inflation while acknowledging reduced downside risks to the labor market. It emphasized the need for caution in adjusting monetary policy. These signals suggest that the Fed may reassess its projected path for rate cuts in 2025.

 

According to FedWatch, markets now anticipate only two rate cuts in 2025, down from the previous expectation of four.

(Source: FedWatch)