The Federal Reserve’s December meeting minutes show that most officials believe that further interest rate cuts would be appropriate if the downward trend in inflation continues as expected. However, there is significant internal disagreement among officials.
On Tuesday, December 30th, the Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) meeting held on December 9th and 10th. Following this meeting, officials voted 9-3 in favor of cutting rates by a quarter point to a range of 3.5% to 3.75%. This marks the Fed’s third consecutive rate cut of the year but also the first instance of three officials casting dissenting votes since September 2019.
The minutes state that some policymakers explicitly expressed their belief that interest rates should remain unchanged “for some time” following the December meeting.
“Among those in favor of the rate cut, a few officials indicated that the decision was made after careful consideration, or that they had initially supported maintaining the target range for the federal funds rate,” the minutes read.
One term that gained traction before this meeting was “hawkish rate cut,” signaling that the Fed would cut rates while also issuing a warning not to have overly high expectations for the next rate cut.
Federal Reserve governor Stephen Miran supported a half-point rate cut, while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee advocated for keeping rates steady.
According to the Fed’s interest rate projections, there is a significant divergence among the 19 participants. Six officials opposed the rate cut and recommended keeping the benchmark rate between 3.75% and 4% by the end of the year – the same level as before the December meeting.
The minutes also reveal significant divergence among policymakers regarding whether inflation or unemployment poses a greater threat to the U.S. economy.
“Most participants believe that adopting a more neutral policy stance would help prevent significant deterioration in labor market conditions,” the minutes state. At the same time, they note, “Some participants highlighted the enduring risk of high inflation and suggested that further policy rate cuts in a scenario of elevated inflation could be misconstrued as a weakening of the commitment to the 2% inflation target.”
Following the meeting, Federal Reserve Chairman Jerome Powell stated in a press conference that the Fed had lowered rates sufficiently to prevent further deterioration in labor market conditions while maintaining a level of rates adequate to continue suppressing inflation.
Due to the six-week government shutdown, officials lacked economic data for October and the first half of November. Policymakers noted that new data may provide them with assistance in the coming weeks.
“Participants leaning towards or potentially supporting keeping the target rate range unchanged believe that the release of extensive labor market and inflation data in between the next two meetings will help determine the necessity of a rate cut,” the minutes said.
Since the last meeting, newly released data has not effectively resolved internal disagreements within the Fed. The unemployment rate rose to 4.6% in November, the highest level since 2021, while consumer price growth remained below expectations. Both of these data points strengthen the arguments of those in support of rate cuts.
However, the annualized GDP growth rate for the third quarter reached 4.3%, the fastest pace in two years. This could heighten the inflation concerns of those opposing a rate cut in December.