Fed Minutes Suggest Interest Rates Are At Cycle's Peak, But Put Imminent Cuts In Doubt

The Federal Reserve’s latest minutes from the December meeting showed that policymakers acknowledged that interest rates are likely at or near the cycle’s peak, indicating a potential shift in monetary policy as the economic landscape evolves.

Economic Growth, Inflation, and Interest Rate Outlook

The minutes reflect an uneven progression in inflation control, particularly noting that “core services prices are still rising at an elevated pace.” This suggests that while some inflationary pressures may be easing, others remain persistent.

Participants noted a deceleration in economic activity from the robust growth observed in the third quarter. Despite this slowdown, the labor market remains strong, with a steady unemployment rate of 3.7%. However, the Fed acknowledged that “growth of economic activity has slowed,” and “job gains have moderated,” underscoring a changing economic environment.

A significant discussion point was the trade-off between the Fed’s dual mandate goals. “A few participants suggested [the] FOMC could face a trade-off between dual mandate goals in the period ahead,” illustrating the challenge of balancing price stability with sustaining economic growth.

Risks and Forward-Looking Stance

The Fed opted to hold policy rates unchanged at 5.25%-5.5% in an unanimous decision, and regarding the current rate level, a consensus emerged that the policy rate is likely at or near its peak.

However, a number of participants highlighted uncertainty around how long restrictive policy would need to be maintained.

Minutes revealed that “almost all participants indicated that…a lower federal funds rate would be appropriate by the end of 2024,” aligning with improvements in their inflation outlooks. This forward-looking stance, coupled with the current steady rate at 5.25%-5.5%, signals a cautious but potentially more accommodative policy in the future. The latest Fed’s dot-plot revealed that the median preference for the Fed funds rate is 4.6% at year-end 2024.

The Fed’s approach remains data-dependent, with a strong emphasis on monitoring incoming information. The minutes stated, “Participants generally stressed the importance of maintaining a careful and data-dependent approach,” signifying a readiness to adapt policy in response to changing economic conditions.

Post Fed minutes release, market reactions varied. The U.S. dollar index dipped 0.1%, with Treasury yields falling and the 10-year yield hitting 3.90%. The S&P 500 initially surged to 4,730, then retreated to 4,710. Meanwhile, the tech-heavy Invesco QQQ Trust QQQ remained 1% lower for the session.

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