Federal Reserve Expects Rate Cuts in 2024 But Path Remains Foggy, Minutes Reveal

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The U.S. Federal Reserve expects to begin cutting interest rates in 2024, according to the minutes from the Federal Open Market Committee’s (FOMC) pivotal December meeting released today.

However, the path to eventual rate cuts remains highly uncertain, with various factors potentially altering the course along the way.

We have posted the minutes from the #FOMC meeting held December 12-13, 2023: https://t.co/kf68fZ2ESr

— Federal Reserve (@federalreserve) January 3, 2024

The FOMC minutes indicate participants foresee the federal funds rate, which currently sits between 5.25 to 5.5%, falling to around 2% by the end of 2024.

This outlook reflects notable improvements in inflation outlooks among policymakers in recent months.

After peaking at 9.1% in June 2022, inflation has steadily declined, reaching 6.5% in December.

Yet despite the predicted rate cuts, the minutes emphasize an “unusually elevated degree of uncertainty” surrounding the future policy path.

Several contingencies could throw things off track, including high inflation proving difficult to rein in or geopolitical events causing new disruptions. The post-pandemic economy remains in uncharted territory, in other words.

Federal Reserve Strikes Cautious Tone Despite Rate Cut Predictions

FOMC members reiterated the need to take a data-dependent approach going forward.

They stressed the importance of keeping policy restrictive until inflation is declining toward the Fed’s 2% target on a sustainable basis.

The minutes state: “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.”

This measured tone aligns with recent commentary from Fed officials like Richmond Fed President Thomas Barkin, who noted the inherent risks in guiding the economy toward a soft landing on Wednesday.

The Fed has thus far implemented the fastest pace of rate hikes since the 1980s to combat rampant inflation.

However, officials emphasized policy decisions will continue adapting to incoming data. The FOMC stressed that actual rate changes remain highly conditional on how the economy evolves.

FOMC Meeting Minutes Show Measured Approach to Policy Path

The minutes show the US central bank believes it has made “clear progress” on inflation, with price pressures easing in some areas of the economy. But the FOMC pointed to uneven progress, with inflation in services and labor markets requiring further decline.

Officials also addressed the Fed’s balance sheet reduction program for the first time since September.

The Fed has trimmed roughly $1.2 trillion from its asset holdings since beginning quantitative tightening in June.

The minutes indicate the Fed would likely stop shrinking its near $9 trillion portfolio when bank reserves reach an ample level, providing advance notice before halting the roll-off process.

The minutes paint a picture of a Federal Reserve ready to relax its aggressively hawkish stance – but only at the right time and pace.

Despite the careful tone from the FOMC, some investors still expect more aggressive Fed rate cuts this year.

Markets are currently pricing in six quarter-point reductions for 2024 based on fed funds futures trading. However, the minutes suggest the FOMC will let economic conditions, not market expectations, dictate policy.

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