After the Federal Reserve completed its third interest rate cut of the year earlier this month, it clearly signaled a pause. With officials currently showing significant divergence in views on inflation and economic risks, the upcoming release of the meeting minutes will reveal the specific considerations and expected duration behind the decision to pause further cuts.
After deciding to cut the benchmark interest rate at the beginning of this month, Federal Reserve officials made it clear that they plan to pause further rate cuts. The minutes of this meeting may help investors assess the duration of the central bank's "dormant period."
"I think they are entering a long-term pause phase. Despite no improvement in inflation, they have already cut rates by a cumulative 75 basis points this year," said Claudia Sahm, former senior Fed official and current chief economist at New Century Advisors.
The Federal Reserve will release the minutes of this meeting at 3:00 AM Beijing time on Wednesday.
Policy Review: Three consecutive rate cuts within the year bring the benchmark interest rate closer to the neutral range.
Starting from September, the Federal Reserve announced a 25-basis-point reduction in the benchmark interest rate at three consecutive meetings, lowering the benchmark rate range to 3.5% to 3.75%.
In its December policy statement and economic forecast, the Federal Reserve signaled a "wait-and-see" approach, which Chairman Powell further emphasized during the press conference following the meeting.
"Since September, our adjustments to the policy stance have brought it into a reasonable estimate of the neutral interest rate range, allowing us to appropriately decide the magnitude and timing of future policy rate adjustments based on incoming data, evolving economic outlooks, and risk balances," Powell said at the December press conference after the rate cut.
Federal Reserve officials believe that the three rate cuts this year have brought the central bank’s policy stance closer to a neutral level where it neither restrains nor stimulates demand.
There is a clear divergence among officials regarding whether higher future inflation or a weakening economy poses a greater risk. Therefore, they view the neutral interest rate level as an ideal point for observing how the economy evolves.
New York Fed President Williams also underscored this signal, stating in a recent television interview that there is currently no urgency for further rate cuts.
Market Outlook: The Tone of the Meeting Minutes to Change, Duration and Logic Behind the Pause Become Key Focus
Lou Crandall, Chief Economist at Wrightson ICAP, pointed out that the tone of the December meeting minutes will differ from the previous two meetings.
He stated that the core message conveyed in the minutes will be 'They will maintain the current policy unchanged unless absolutely necessary.'
Crandall added that the minutes are likely to detail reservations held by several Federal Reserve officials regarding the December interest rate cut decision.
Kathy Bostjancic, Chief Economist at Nationwide Financial, stated that investors should focus on the duration of the Federal Reserve's pause in rate cuts when reviewing the minutes.
The minutes are expected to reflect whether Fed officials concerned about inflation remain steadfast in their original stance and unwilling to change, while those more focused on the labor market may also elaborate on the basis for their positions.
Bostjancic noted that she believes the Fed will maintain its pause until June of next year. She mentioned that by then, Fed Chair Powell’s term will conclude in May, Trump's nominee as Powell's successor should be in office, and signs of inflation peaking will become evident.
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