Federal Reserve officials agreed during their last policy meeting of 2023 that interest rates were likely at their peak and almost all of them predicted lower rates “would be appropriate by the end of 2024,” according to minutes from that meeting released by the central bank on Wednesday.
But there wasn’t a discussion of exactly when those cuts could begin and participants kept the option of higher rates on the table if inflation were to heat up again.
There was also some divergence about exactly how the future could unfold, with several suggesting rates could stay at this peak for “longer than they currently anticipated” and a number of participants warning about the risks to the economy of being restrictive for too long.
Where officials on the Federal Open Market Committee were aligned was that the central bank had made clear progress on cooling inflation, citing a six-month reading of so-called “core” inflation as well as signs that demand and supply were coming into better balance.
Yet meeting participants said inflation was still well above the committee’s longer-run goal and that a risk remained that progress toward price stability would stall as inflation approaches the Fed’s 2% target.
They “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,” according to the minutes.
The minutes released Wednesday offer new insight into a closed-doors conversation on December 13 that became the subject of some confusion in recent weeks as Fed officials diverged publicly on the subject of rate cuts in the year ahead.
In a press conference that followed the Fed’s last meeting, Fed Chair Jerome Powell made it clear that central bank officials had started the conversation of when to dial back policy restraints, calling it a “topic of discussion” at the December meeting and “a topic for us looking ahead.”
The markets rallied on Powell’s comments, cheering a return to cuts and predicting that cycle could start as early as March. The Fed last raised rates in July, to a 22-year high, and is now predicting a median of three rate cuts in 2024.
But in subsequent days, several Fed officials tried to walk back whether cuts would actually happen or how quickly.
Chicago Fed President Austan Goolsbee said the Fed had not pre-committed to cutting rates soon or swiftly, while New York Fed President John Williams said it was “premature” to talk about a rate cut in March.
Cleveland Fed President Loretta Mester said markets had gotten “a little bit ahead” of the Fed, while Richmond Fed President Tom Barkin told Yahoo Finance he needed to see more conviction that inflation was in fact returning to the Fed’s 2% target before cuts could begin.
Other officials, however, did acknowledge publicly that cuts are on the table if inflation keeps tumbling. One was San Francisco Fed president Mary Daly, who said it was appropriate to begin the rate-cut discussion given progress on inflation.
It is clear that the Fed’s decisions in 2024 will not be straightforward and will hinge on data. While the median projection for next year is three cuts, predictions from individual Fed members vary, according to a “dot plot” released by the Fed last month.
Two members see holding rates at current levels, five see two cuts next year, six see three cuts, and four see four cuts next year.
Recent data on inflation does help make the case for a dovish shift in 2024 to rate cuts. The “core” Personal Consumption Expenditures index — which excludes volatile food and energy prices — clocked in at 3.2% for the month of November.
Another encouraging sign: core inflation dropped to 1.9% on a six-month annualized basis, which is below the Fed’s target of 2%.
Markets have boosted bets on the number of cuts by the Fed next year to six and predicted there is now a better than 70% chance the Fed will begin loosening in March.