Rate cuts likely, but path highly uncertain

Federal Reserve officials in December concluded that interest rate cuts are likely in 2024, though they appeared to provide little in the way of when that might occur, according to minutes from the meeting released Wednesday.

At the meeting, the rate-setting Federal Open Market Committee agreed to hold its benchmark rate steady in a range between 5.25% and 5.5%. Members indicated that they expect three quarter-percentage point cuts by the end of 2024.

However, the meeting summary noted a high level of uncertainty over how, or if, that will happen.

“In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves,” the minutes stated.

Officials noted the progress that has been made in the battle to bring down inflation. They said supply chain factors that contributed substantially to a surge that peaked in mid-2022 to have eased. In addition, they cited progress in bringing the labor market better into balance, though that also is a work in progress.

The “dot plot” of individual members’ expectations released following the meeting showed that members expect cuts over the coming three years to bring the overnight borrowing rate back down near the long-run range of 2%.

“In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024,” the document stated.

However, the minutes noted an “unusually elevated degree of uncertainty” about the policy path. Several members said it might be necessary to keep the funds rate at an elevated level if inflation doesn’t cooperate, and others noted the potential for additional hikes depending on how conditions evolve.

“Participants generally stressed the importance of maintaining a careful and data-dependent approach to making monetary policy decisions and 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,” the minutes stated.

Despite the cautionary tone from Fed officials, markets expect the central bank to cut aggressively in 2024.

Fed funds futures trading points to six quarter-point cuts this year, which would take the fed funds rate, which primarily sets what banks charge each other for overnight loans but also influences multiple consumer debt products, down to a range between 3.75-4%.

Earlier Wednesday, Richmond Fed President Thomas Barkin on Wednesday also expressed caution about policy, noting the number of risks inherent in trying to guide the economy to a soft landing.

The minutes indicated that “clear progress” had been made against inflation, with a six-month measure of personal consumption expenditures even indicating that the inflation rate has edged below the Fed’s 2% target.

However, the document also noted that progress has been “uneven” across sectors, with energy and core goods moving lower but core services still moving higher.

Officials also addressed the Fed’s effort to reduce the bond holdings on its balance sheet. The central bank has shaved about $1.2 trillion by allowing maturing proceeds to roll off rather than reinvesting them as usual.

Several FOMC members said it likely would be appropriate to wind down the process when bank reserves “are somewhat above the level judged consistent with ample.” Those officials said discussions would begin well in advance of stopping the process so the public had plenty of notice.