Minutes from the Federal Reserve's December policy meeting on Wednesday revealed a consensus that interest rate cuts "would be appropriate by the end of 2024." However, there is a considerable degree of uncertainty regarding the timing, size and number of potential adjustments.
During their final policy meeting of 2023, Federal Reserve officials reached a consensus that interest rates had likely peaked. The committee decided to maintain its benchmark rate within a range of 5.25 percent to 5.5 percent.
"Many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for the Committee to reach its inflation goal," wrote the document.
The discussions, however, did not delve into the specific timing of the anticipated rate cuts. The officials underlined their commitment to a cautious and data-driven strategy when it comes to making decisions on monetary policy.
There was a difference in opinions about how long rates might stay at this level, with some thinking it could be longer than initially anticipated. Some participants were concerned about the risks of keeping rates high for too long. They maintained the possibility of higher rates if inflation were to resurge.
Despite these concerns, officials acknowledged progress in addressing inflation, pointing to improvements in supply chain issues that had contributed significantly to a mid-2022 surge and a better balance in the job market.
Recent inflation data supports the case for a dovish shift in 2024. The "core" Personal Consumption Expenditures index increased by 2.6 percent in November from last year. It was also up 3.2 percent, excluding volatile food and energy prices.
Another positive sign is that core inflation dropped to 1.9 percent on a six-month annualized basis, falling below the Fed's 2.0 percent target.
While inflation had decreased, meeting participants acknowledged that it still exceeded the committee's longer-run goal, and there remained a risk of progress toward price stability stalling as inflation approached the Fed target.
According to the minutes, officials "reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the committee's objective."
March rate cut unlikely
Wednesday's released minutes shed light on a discussion held in mid-December, causing confusion as Federal Reserve officials publicly shared differing views on potential rate cuts in 2024.
In a post-meeting press conference, Fed chair Jerome Powell clarified that central bank officials had initiated talks on when to ease policy restraints, labeling it a "topic of discussion" during the December meeting and highlighting its relevance "looking ahead."
Powell's comments led to a market rally, with investors hopeful for potential rate cuts starting as early as March.
However, in the following days, several Fed officials tried to manage expectations regarding the likelihood and speed of rate cuts. Chicago Fed president Austan Goolsbee clarified that the Fed had not committed to cutting rates soon.
According to Cleveland Fed president Loretta Mester, markets had gotten "a little bit ahead" of the Fed. New York Fed President John Williams also deemed it "premature" to discuss a rate cut in March.
"If we get the progress I am hoping to see on inflation and the economy, then, of course, it will be kind of natural to move monetary policy over a period of a few years to a more normal level," Williams said.
Meanwhile, Richmond Fed president Tom Barkin said he needed more conviction that inflation was returning to the Fed's 2.0 percent target before considering cuts.