Fed minutes may elaborate on coming rate cut debate
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[January 03, 2024] By
Howard Schneider
WASHINGTON (Reuters) - Precisely when the Federal Reserve will start
cutting interest rates stands as the big unknown for markets and
economists as 2024 kicks off, and fresh details about its pivot in that
direction may emerge from Wednesday's readout of the last policy meeting
of 2023.
Fed officials at their meeting in mid-December held the policy interest
rate steady in the range of 5.25% to 5.5%, but issued projections
showing most officials expect it would need to fall over the year by at
least three quarters of a percentage point as inflation steadily
declined to the Fed's 2% target.
But the year-end projections leave the timing about any initial rate cut
in doubt, and Fed Chair Jerome Powell at his press conference following
the meeting insisted that was not yet a live topic of discussion.
Investors eager to see the Fed move swiftly to bring down borrowing
costs now broadly expect a first rate cut in March, market pricing of
contracts tied to the Fed policy rate shows. Economists on balance see
the Fed holding off until closer to mid-year.
Minutes of the Dec. 12-13 meeting, scheduled for release at 2 p.m. EST
(1900 GMT), may give insight on just how close officials feel they are
to the point where monetary policy needs to be less restrictive in order
to keep a hoped-for "soft landing" on track, with inflation continuing
to fall without a major blow to the job market.
"The directionality for the Fed is clear as falling inflation is pushing
it toward a rate cut," wrote SGH Macro Advisors Chief U.S. Economist Tim
Duy, who noted that the combination of slowing inflation and a steady
federal funds rate means that monetary policy is in effect becoming more
restrictive even as inflation eases and employment growth is expected to
slow.
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Though he said the minutes are "unlikely to directly point" to the March
rate cut currently expected by investors, "I suspect they will reveal
the Fed becoming increasingly confident that inflation is on a path to
price stability."
In fact data issued since the Fed's meeting, and effectively anticipated
by policymakers at their Dec. 12-13 session, took a strong turn in that
direction.
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![](../images/010324PIX/busine70.jpg)
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. REUTERS/Kevin Lamarque/File
Photo
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The headline personal consumption expenditures price index for
November fell; excluding volatile food and energy costs the "core"
rate of inflation rose less than 1% on an annualized basis. Over the
six months from June through November, a time frame Fed officials
have pointed to as helpful in shaping their policy debate, core PCE
inflation has been slightly below the 2% target - a fact some
analysts note may push the Fed towards rate reductions sooner than
later.
Powell noted at his last press conference that rates would need to
fall before inflation returns to the 2% target because otherwise
"it'd be too late," and policy would be more restrictive - and the
risks to the job market greater - than necessary.
In an analysis of Fed policy scenarios for the year, Deutsche Bank
economists said they felt as a baseline the Fed would begin reducing
rates in June, but that if inflation data is weaker than expected "a
first rate cut as early as March would be reasonable."
Investors in contracts tied to the Fed's policy rate currently put
about an 80% probability on a March cut, according to data from the
CME Group's FedWatch tool, with the Fed ultimately cutting the rate
1.5 percentage points by the end of the year - twice what Fed
policymakers anticipate.
Upcoming jobs and inflation data will shape the eventual outcome,
with new job openings data also released Wednesday, a December
employment report due Friday, and December consumer inflation data
out next week.
The Fed next meets on Jan. 30-31.
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea
Ricci)
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