Minutes of the Federal Open Market Committee (FOMC) meeting on December 12-13 released on Wednesday said: “Members considered that the policy rate was likely to be at or near the peak of this tightening cycle.”
Officials “reaffirmed that it would be appropriate to maintain a restrictive policy stance for some time until inflation is clearly on a sustainable path.”
Still, officials praised the progress in fighting inflation. The committee is ready to cut rates in 2024 if inflation continues to decline, although it has not given a clear indication.
“In the projections submitted, most Committee members pointed to improvements in the inflation outlook. The baseline projections imply that late 2024 is consistent with a low interest rate environment,” the minutes said.
At its December meeting, the Fed kept interest rates at 5.25%-5.5% for the third consecutive time. Meanwhile, the FOMC statement left open the possibility of another rate hike.
The FOMC's less-than-dovish stance sparked a rally in US stocks and bonds, prompting an easing of financial conditions.
“They are ready to pivot,” said Laura Rosner-Warburton, senior economist at Macropolicy Perspectives LLC. “They see a soft landing ahead, and they are willing to do that as long as inflation continues to be moderate.”
However, individual FOMC members’ views on the federal funds rate by the end of 2024 varied widely. The Fed’s “dot plot” showed that eight officials thought two quarter-point cuts or less were needed, while 11 officials expected a cut of three points or more.
An adjustment to the statement after the December meeting also showed a change in policymakers' attitudes. The FOMC will monitor a range of data and developments to adjust policy accordingly.
For their part, derivatives markets are predicting six rate cuts by the Federal Reserve this year, with the first cut coming in March by 25%. However, some Fed officials have dismissed those expectations.
The FOMC will next meet on January 30-31 to discuss policy.
Fed Chairman Jerome Powell said it was too early to declare victory, although he confirmed officials had discussed when to "exit".
“Some FOMC members still acknowledge the risk of a recession due to the weakening labor market... They will start cutting interest rates in the first quarter of this year in an effort to avoid a recession,” said Bloomberg economist Stuart Paul.
The Fed's inflation gauge showed prices rose just 1.9% in November 2023 on a six-month annual basis, the first time in more than three years that the gauge has slipped below the Federal Reserve's 2% target.
Meanwhile, the US labor market remains relatively healthy despite high interest rates.
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