On December 29, local time, the minutes of the Federal Reserve's December policy meeting showed that the Federal Open Market Committee (FOMC) had a relatively thorough discussion of the inflation and employment risks facing the U.S. economy before deciding to cut interest rates. Although the committee ultimately agreed to lower the target range for the federal funds rate by 25 basis points, the minutes indicated that the decision was not based on broad consensus, with several officials expressing reservations about the necessity and timing of the rate cut, and policy disagreements widening.
Interest rate cuts are not a consensus.
The minutes show that at its monetary policy meeting on December 9-10, the Federal Reserve agreed to lower the policy rate to 3.5% to 3.75% after comprehensively assessing the economic outlook and the distribution of risks. However, even some officials who supported the rate cut believed that the decision was "a trade-off" and that they "could have supported keeping the target range unchanged" under different circumstances.
The economic projections released after the meeting showed that six officials opposed the rate cut, including two voting FOMC members. The minutes indicated that these objections primarily focused on the assessment of the progress of the decline in inflation.
Officials who supported the rate cut argued that the recent slowdown in job creation and the rise in the unemployment rate indicated increased downside risks to the labor market since the middle of the year. Against this backdrop, moderate policy easing would help reduce the likelihood of further weakness in the job market. The minutes stated that most participants ultimately accepted this assessment, viewing the rate cut as a forward-looking risk management measure.
However, some officials expressed a more cautious view on the inflation situation. The minutes show that some participants believed progress toward achieving the Committee's 2% inflation target had recently stalled, and inflation was likely to remain at a relatively high level in the near term. These officials believed that continuing to ease policy in the face of an uncertain inflation outlook could increase the risk of policy miscalculation.
Based on the above assessments, some participants suggested that after lowering the interest rate range at this meeting, it would be appropriate to maintain the policy rate unchanged for a period of time. The minutes also showed that most officials believed that if inflation gradually declines as expected, further interest rate cuts would still be reasonable, but this would require additional data as a prerequisite.
Reserves fall to adequate range
As policy rates gradually approach the neutral range, opinions within the Federal Reserve regarding the scope for further rate cuts are becoming increasingly divergent. The latest projections released after the December meeting indicate that officials expect one rate cut throughout next year. The wording in the policy statement also suggests that the committee may choose to postpone further rate adjustments until inflation shows a clear decline again or the unemployment rate is significantly higher than expected.
The meeting minutes also revealed that the Federal Reserve had assessed the banks' situation. The balance of reserves in the monetary system decreased from the previous "ample" level to the "sufficient" range, and based on this, the decision was made to initiate the purchase of short-term U.S. Treasury bonds. The minutes emphasized that the purpose of such reserve management purchases was to maintain the smooth operation of the interest rate control mechanism and should not be interpreted as a change in the stance of monetary policy.
According to the minutes, the Federal Reserve plans to launch related operations starting December 12, with an initial purchase size of approximately $40 billion. Staff believed that, considering the potential additional drain on reserves due to tax payments at the end of April, starting the purchases early would help reduce the risk of liquidity volatility. Policymakers generally agreed to flexibly adjust the size and pace of subsequent operations based on market conditions.
Regarding the macroeconomic outlook, the minutes showed that participants generally expected economic growth to accelerate in 2026, with economic activity expanding at a pace close to potential output in the medium term. Changes in fiscal and regulatory policies, as well as relatively favorable financial conditions, were considered likely to support growth. However, officials also acknowledged that significant uncertainty remained regarding forecasts for actual economic growth.
Regarding inflation, participants generally expected inflation to remain somewhat high in the short term before gradually declining to 2%. While most officials believed the impact of tariffs on core goods inflation might weaken, their assessments of the timing and magnitude of this transmission remained inconsistent. Meanwhile, rising downside risks to employment in recent months became a significant factor driving some officials to support a transition to a more neutral policy stance.
The Federal Reserve's next policy meeting will be held from January 27 to 28. The market widely expects the central bank to maintain its benchmark interest rate unchanged.
(Article source: CBN)
