2024-01-04 06:50:28
(CNN) – The minutes of the Federal Reserve meeting released on Wednesday showed that Federal Reserve officials discussed the issue of lowering interest rates during their meeting last December.
Officials’ latest economic forecasts issued in December showed they expect to cut interest rates this year for the first time since the start of a historic campaign to curb inflation in March 2022.
The central bank has seen significant progress since then: Inflation currently stands at less than 3%, according to the Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index, well below the four-decade peak it reached. In the summer of 2022.
While some officials remained cautious about upside risks to inflation during the December meeting, according to meeting minutes, they also recognized that the Fed’s key interest rate “will likely be at or near its peak during this tightening cycle.”
Fed officials opined that “the current stance of monetary policy was constrained and appeared to be constraining economic activity and inflation,” but that “the economy could have developed in a way that would make additional increases in the target range appropriate.” Officials also considered it “appropriate for policy to remain in a restrictive position for some time until inflation is clearly moving sustainably towards the Committee’s target.”
Wall Street is ready to cut interest rates
Wall Street is eager for a rate cut, with some investors pricing in this first cut of the spring. However, officials have come out to temper this optimism, stressing that there are still risks that could sabotage the inflation defeat.
Markets currently see about a 63% chance of a first rate cut in the spring, according to futures. The timing and pace of interest rate cuts is where the Fed and Wall Street appear to be diverging. For example, JPMorgan expects 5 quarter-point cuts this year starting in June, compared to an average Fed officials estimate of three cuts in 2024.
Goldman Sachs expects to begin cutting interest rates in March, but some officials, such as New York Fed President John Williams, have said cutting rates is not something the Fed is seriously considering yet.
“The minutes showed that the cuts may not be as drastic as people think, and that interest rates may remain high for a while,” Callie Cox, US investment analyst at eToro, wrote in a note Wednesday. “While this is a good sign for the future of the economy, it could limit the ‘animal spirits’, referring to the irrational factors and emotions that influence decision-making and economic behavior, which we have been witnessing in the markets recently,” he added.
Minutes from Wednesday’s meeting showed that central bank officials want to see a steady trend of easing price rises before cutting interest rates. So far, investors have scoffed at any hawkish comments from officials suggesting additional interest rate hikes are still on the table.
The last mile of the Fed’s fight against inflation may be the hardest. The U.S. economy likely finished 2023 on a strong note, with fourth-quarter GDP expected to expand more than 2% and employers likely to add more than 100,000 jobs in December, according to FactSet estimates.
But are the conditions available?
The state and path of inflation is the main deciding factor for lowering interest rates, but officials are examining several other aspects of the economy. Personal consumption expenditures fell on a monthly basis in November for the first time in more than three years. Annual inflation was 2.6% in November, still above the 2% target, but a significant improvement from the four-decade high of 7.1% in June 2022. The core reading, which excludes food and energy prices, was Volatile, 3.2% in November compared to the previous year.
By other measures, inflation has already fallen below the 2% threshold. On a six-month annual basis, the core personal consumption expenditures price index rose 1.9% in November, the first time this measure has fallen below 2% in more than three years.
However, the Fed has not declared victory yet, but has signaled a slight turnaround. The central bank’s latest policy statement issued last month indicated that it would consider a range of data and other factors to determine whether “any” further policy tightening would be appropriate.
Officials are also looking at economic activity more broadly, because 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.
There is also still a possibility that the inflation slowdown will stall.
“As I talk to companies, I continue to hear a lot of planning for higher-than-usual rate increases,” Richmond Fed President Thomas Barkin said Wednesday during an event in Raleigh, North Carolina.
“After decades of no pricing power, companies, especially those facing margin pressures, will not want to back down from raising prices until their customers or competitors force them to do so,” he said.
That could mean additional action from the Fed to “convince rate setters that the era of inflation is over,” Barkin added.
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