The minutes of the Federal Reserve meeting hinted that this round of interest rate hikes is over, and the timetable for interest rate cuts is still unclear.

Powell said, “We will not wait until inflation reaches 2% before cutting interest rates. That would be too late.”

Written by Nick Timiraos

Compiled by: Mary Liu, BitpushNews

The minutes of the Federal Reserve meeting on December 12th and 13th released early this morning Beijing time showed that the Federal Reserve has completed this round of interest rate hikes, but did not disclose a meaningful debate on when to start cutting interest rates.

The minutes showed that although almost all officials expect the policy rate to eventually be lowered before the end of this year, uncertainty about how to respond to the next monetary policy cycle is increasing.

Some policymakers are uncomfortable with keeping interest rates too high for too long. They highlighted “the downside risks that an overly restrictive stance could bring to the economy,” the minutes said. They noted that the labor market slowdown could “shift rapidly from gradual easing to a more sudden decline.”

At the same time, the meeting minutes showed that other policymakers believed that “circumstances may require keeping the target rate at its current value for longer than they currently anticipate.” Richmond Fed President Tom Barkin said in remarks on Wednesday that this may be necessary if inflation runs well above the Fed’s 2% target.

Between March 2022 and July 2023, the Federal Reserve held 12 policy meetings, including 11 rate hikes. Since then, as inflation has cooled, the committee has kept the benchmark federal funds rate at a range of 5.25% to 5.5%, a 22-year high.

Federal Reserve Chairman Jerome Powell’s speech on December 13th caused some confusion. Powell’s comments, along with economic forecasts released after the meeting, suggest the Fed’s next move is more likely to be a rate cut, although the Fed maintained written guidance saying officials were more focused on economic risks requiring higher rates.

As a result, the market has increased bets on interest rate cuts this year, triggering a sharp rebound in stock and bond markets at the end of 2023.

Investors expect the central bank to start cutting interest rates at its second policy meeting in March this year, with the Fed’s next meeting scheduled for January 30-31.

The meeting minutes showed that the Fed’s interest rate hikes were working, which put investors’ minds at ease. The latest minutes did not mention the “unacceptably high” inflation mentioned in previous versions.

The minutes showed, however, that officials may be on alert again if markets rebound too much from easing financial conditions, making it more difficult to sustain an economic slowdown and sustained declines in inflation.

The U.S. economic outlook has appeared to be getting better in recent months as inflation and wage growth are slowing. If the economy weakens more than officials expect, that would give the Fed more room to cut interest rates quickly and could open the door to a rate cut even if the expansion doesn’t stop.

A year ago, many economists expected that Fed officials would have to raise interest rates to a level that would create enough slack, such as unemployed workers and idle factories, to significantly slow inflation. But repairs to supply chains and an influx of workers into the labor market are keeping wage and price gains in check without causing widespread economic weakness.

The minutes gave little indication of how officials viewed the prospect of a rate cut. Officials believed the risk of higher-than-expected inflation late last year had subsided, but the minutes highlighted a debate over the extent of the improvement in expectations.

Last month, some officials argued that the easy part of fighting inflation was complete as supply chains and labor markets fully recovered from pandemic-related disruptions. That could require the Fed to keep interest rates higher than needed to curb economic activity.

Speaking in Raleigh, North Carolina, Barkin said: “After decades without pricing power, companies - especially those facing profit pressures - will not be willing to give up raising prices unless their customers or competitors force them to do so. Take action. If that’s the case, I fear more will have to be done to reduce demand and convince price-setters that the era of inflation is over.”

Others, however, see the potential for continued supply-side improvements, which could prolong the relatively costless decline in inflation and raise the question of when to cut interest rates.

Fed officials are finding it increasingly difficult to head off market expectations for earlier and deeper interest rate cuts, largely because inflation is cooling faster than central bank policymakers expect.

Last month, Fed officials expected core inflation, which excludes volatile food and energy prices, to end the year at 3.2%, down half a percentage point from their forecast three months ago. Data received during last month’s Fed meeting pointed to a continued decline in core inflation. It fell to 1.9% on a six-month annualized basis in November, according to the U.S. Commerce Department. The Fed’s inflation target is 2%.

Powell stoked market enthusiasm when he volunteered that some officials at the Fed’s policy meeting had described their own prospects for cutting interest rates. In the days following the meeting, some officials used public speeches to push back on expectations of an imminent shift to rate cuts. John Williams, Powell’s senior deputy, New York Fed president and vice chairman of the Fed’s rate-setting committee, later clarified that cutting interest rates was not the main focus of the policy meeting.

Analysts considered Powell’s comments last month noteworthy because he was more concerned than before about the risk that too high interest rates could cause unnecessary damage to the economy as inflation falls. “We realize the risks of holding on for too long,” he said. “We are very careful not to make mistakes like this.”

Powell also reiterated his view that interest rates may be lowered next year as inflation approaches the 2% target. Keeping interest rates steady as inflation falls would cause inflation-adjusted or “real” interest rates to rise, something the Fed doesn’t want. Policymakers can lower nominal interest rates just to prevent real rates from becoming too tight.

“We’re not going to wait until inflation reaches 2 percent before we cut interest rates, that would be too late,” Powell said.