Fed minutes show most officials expect additional rate cuts

Officials earlier this month voted 9-3 to lower their benchmark interest rate by a quarter percentage point for the third straight time, to a range of 3.5% to 3.75%. But they included a small change in their post-meeting statement that suggested officials were less certain about when the FOMC might cut rates again.

Policymakers were also divided over the decision. Governor Stephen Miran voted against the action in favor of a half-point cut, while Chicago Fed President Austan Goolsbee and Kansas City’s Jeff Schmid dissented in favor of keeping rates unchanged.

Rate projections pointed to an even deeper split among the larger group of 19 policymakers. Six officials signaled their opposition to the rate reduction by recommending the benchmark rate should stand at 3.75% to 4% at the end of 2025 — where it stood before the December meeting.

In addition, the median projection pointed to one rate cut in 2026, though individual projections ranged widely.

On Tuesday morning before the minutes’ release, investors saw less than a 20% probability of the FOMC cutting rates at its next gathering.

Federal funds futures contracts suggest investors expect at least two quarter-point rate reductions in the coming year.

Deep Division
The minutes continued to point to considerable differences among policymakers over whether inflation or unemployment posed the greater peril to the US economy.

“Most participants noted that a move toward a more neutral policy stance would help forestall the possibility of a major deterioration in labor market conditions,” the minutes noted.

At the same time, it continued, “several participants pointed to the risk of higher inflation becoming entrenched and suggested that lowering the policy rate further in the context of elevated inflation readings could be misinterpreted as implying diminished policymaker commitment to the 2% inflation objective.”

Speaking to reporters following the meeting, Chair Jerome Powell suggested the Fed had lowered rates enough to guard against a more serious deterioration in the labor market while leaving rates high enough to continue weighing on inflation.

Officials lacked typical economic data due to the government shutdown that lasted for all of October and nearly half of November.

“Several participants noted that there could be swings in measures of economic activity associated with the government shutdown, which could make it more difficult over coming months to determine the underlying trend in growth,” the minutes said.

Since the meeting, fresh data has done little to resolve divisions at the Fed. In November unemployment rose to 4.6%, its highest level since 2021, and consumer prices increased by less than expected. Both releases bolstered the case for those supporting lower rates.

But the economy grew in the third quarter at an annualized rate of 4.3%, the fastest pace in two years, likely fanning worries over inflation for those who opposed the December cut.