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© Reuters. FILE PHOTO: Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., December 13, 2023. REUTER
By Howard Schneider
WASHINGTON (Reuters) -Federal Reserve officials appeared increasingly convinced last month that inflation was coming under control, with diminished “upside risks” and growing concern about the damage “overly restrictive” monetary policy might do to the economy, according to the minutes from the U.S. central bank’s Dec. 12-13 meeting.
As a result, “almost all participants indicated that … a lower target range for the federal funds rate would be appropriate by the end of 2024,” said the minutes, which were released on Wednesday, with “a number of participants” highlighting increased uncertainty about how long strict monetary policy would need to be maintained given the progress achieved on lowering inflation.
In a firm nod to their progress in easing pricing pressures, policymakers also, for the first time since June 2022, did not use the phrase “unacceptably high” to describe inflation.
U.S. stocks slightly pared losses following the release of the minutes but were still down for a second straight day, while the U.S. dollar added to gains against a basket of currencies. U.S. Treasury yields were little changed.
Traders of interest rate futures largely stuck to bets that the central bank’s Federal Open Market Committee would start to cut rates in March, with the policy rate seen ending the year in the 3.75%-4.00% range, 1.5 percentage points lower than where it is now.
“There is nothing in these minutes to dissuade us that the Fed will start to cut interest rates from this March onwards,” said Paul Ashworth, chief North America economist at Capital Economics.
‘TRADEOFF’
“A few” Fed officials said they felt the central bank was approaching a point where it may face a “tradeoff” between its dual goals of controlling inflation and maintaining high rates of employment – the sort of sacrifice policymakers have hoped to avoid in their search for a “soft landing” from the worst breakout of inflation in 40 years.
“Participants pointed to the decline in inflation seen during 2023, noting the recent shift down in six-month inflation readings in particular,” the minutes said, which through November were running just below the Fed’s 2% target.
The minutes shed little light on when rate cuts might commence. Indeed participants also noted “an unusually elevated degree of uncertainty” about the economic outlook, with further rate increases still possible.
But the detailed account of the session also reflected a debate underway about how to safeguard the economy while also seeing inflation continue to fall.
“Most” felt that monetary policy was having its intended impact and would continue to do so by dampening household and business spending and pulling inflation back to target.
Participants “stressed … 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.”
But they also said coming policy decisions would be “careful and data-dependent,” cognizant of developing risks to the economy and faster-than-anticipated gains on inflation.
The Fed held its benchmark overnight interest rate steady in the current 5.25%-5.50% range at last month’s policy meeting, with new economic projections showing most officials expect that the policy rate will need to be lowered by three-quarters of a percentage point over the course of 2024.
Precisely when the Fed will start cutting interest rates stands as the big unknown for markets and economists at the start of 2024. The Fed’s next policy meeting is scheduled for Jan. 30-31.
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