Fed's December Minutes Spark Debate On Future Rate Cuts: Did Powell 'Let The Cat Out Of The Bag'?

The Federal Reserve’s December minutes have elicited varied reactions from financial experts, who sparked discussions regarding the potential pace and scale of future rate cuts.

Inflation Slowing, But Sustainability is Key

Peter Boockvar, chief investment officer of Bleakley Financial Group, acknowledges the positive aspect of slowing inflation.

Yet he emphasizes the importance of sustainable inflation rates over cyclical downturns. “The Fed is not in a rush to respond with many rate cuts to the cyclical drop in inflation,” Boockvar states, underscoring the need for confidence in sustained inflation moderation before significant policy shifts occur.

It is a cheer that inflation is slowing but the question for inflation & rates at this point is not the cyclical downturn we're currently experiencing after the spike we saw, it is where it SUSTAINABLY settles out at. By reading the Fed minutes, the Fed is not in a rush to…

— Peter Boockvar (@pboockvar) January 3, 2024

Agreement On Peak Rates, Cautiousness On Cuts

Mohamed El-Erian, president of Queens’ College, Cambridge University, and chief economic advisor at Allianz, points out a shared view between the markets and the Fed regarding peak rate levels.

While there’s an expectation that rates will decrease in 2024, El-Erian said the Fed’s cautious stance on the scale and speed of such cuts indicates a more measured approach than market participants might hope for.

The Fed ‘Let The Cat Out Of The Bag’

According to Charlie Ripley, senior investment strategist for Allianz Investment Management, the minutes suggest the Federal Reserve is attempting to clarify its position after the December FOMC meeting, where he said the Fed “let the cat out of the bag” by indicating 75 basis points of rate cuts in 2024.

The Fed is concerned the market may have interpreted its previous statements as overly dovish and wants to correct this perception, Ripley said. The expert said the minutes suggest the Fed is not expecting a rate cut in March, indicating a more cautious approach to monetary policy.

Balancing Uncertainty With Policy Options

Jeffrey Roach, chief economist for LPL Financial, highlights the tension within the FOMC revealed by the minutes. He acknowledges the immense uncertainty clouding the macroeconomic landscape, suggesting the Fed wants to keep its options open. Roach predicts that while the Fed may hold rates steady in March, it could start preparing markets for a potential cut later in the year if growth falters.

Hawkish Tones Trigger Rate Cut Rethink

Quincy Krosby, chief global strategist for LPL Financial, observes a more hawkish tone in the Fed minutes compared to Powell’s press conference.

Many members endorse the “higher rates for longer” narrative, with rate cuts in 2024 expected later in the year, he said. The minutes have led to an adjustment in expectations for a March rate cut, with probabilities decreasing from 85% to 71%. Krosby also notes that while equity markets remain technically overbought, the release of the minutes did not trigger a deeper sell-off.

Read now: Soft Landing? Don’t Bet On It Just Yet: Fed’s Barkin Indicates Further Rate Hikes Possible

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