Fed meeting minutes reveal serious divisions: many believe it is not suitable to cut interest rates in December.

Li Dan, Wall Street Journal

The minutes of the Federal Reserve meeting show that at last month's monetary policy meeting, there was significant disagreement among decision-makers about whether to cut interest rates in December. The number of those who believe that further cuts are not necessary this year did not reach a majority, but it exceeded the number of those supporting a rate cut, with some centrists suggesting it should depend on the data. Regarding the quantitative tightening (QT) actions of reducing the balance sheet, there was almost complete consensus that it should be halted. In terms of risks to financial stability, some are concerned about an unordered decline in the stock market.

The Federal Reserve meeting minutes released on Wednesday, November 19, Eastern Time, stated:

"When discussing the recent direction of monetary policy, participants expressed vastly different views on the policy decisions that the (Federal Open Market Committee) FOMC is most likely to make at its December meeting. Most participants believe that as the committee gradually shifts to a more neutral policy stance, it may be appropriate to 'further lower interest rates,'

“However, some (several) people hinted that they do not necessarily believe the December meeting is suitable for another 25 basis point rate cut. Some (several) participants evaluated that if economic developments between the next two meetings align with their expectations, it may be more appropriate to further lower rates in December. Many (many) participants stated that based on their economic outlook, it may be appropriate to keep interest rates unchanged for the remainder of this year.”

All participants agreed that monetary policy is not static, but is influenced by various latest data, changing economic outlooks, and risk balances.

The media pointed out that in the so-called counting terminology commonly used in the Federal Reserve meeting minutes, the term “many” represents a number lower than “most/majority.” Therefore, the above statement indicates that at the last FOMC meeting, those opposed to another rate cut in December were still in the minority.

Nick Timiraos, a senior Fed reporter known as the “New Federal Reserve News Agency,” pointed out that the minutes mentioned that “many” officials believe there is no need to cut interest rates in December, with the number of those holding this view exceeding the “several” officials who think a rate cut might be appropriate. However, most officials still believe that interest rates should be cut in the future, regardless of whether it is in December.

In summary, overall, most Federal Reserve officials believe that interest rates will need to be lowered in the future, regardless of when that happens. This includes the moderates who will look at data to decide whether to lower rates in December; many believe that there may not need to be any more rate cuts this year, while several think it is appropriate to lower rates. The camp advocating for no rate cut in December has not reached a majority, but the number of supporters (many) exceeds that of those supporting a rate cut in December (several).

The statement released after the Federal Reserve's meeting on October 29 indicates that the FOMC decided to cut interest rates by 25 basis points for the second consecutive time. However, among the 12 voters, two opposed this rate cut decision. Unlike before, there were disagreements on the extent of the rate cut and whether to take further action. Among the dissenters, new board member Milan, who was “appointed” by President Trump, still hopes for a 50 basis point cut, while Kansas City Fed President George supports holding steady.

Many believe that the increase in tariffs this year has a limited impact on overall inflation. Most believe that interest rate cuts may exacerbate inflation risks.

The hawkish views within the Federal Reserve are reflected in the minutes statement, which mentioned the discussion of risk management considerations.

Most participants believe that the FOMC's shift to a more neutral policy stance helps to avoid a significant deterioration in labor market conditions. “Many participants also believe that, given the increasing evidence suggesting that raising tariffs this year may have a limited impact on overall inflation, the committee should appropriately ease its policy stance in response to employment downside risks.”

Most attendees pointed out that against the backdrop of persistently high inflation data and a slowly cooling labor market, further interest rate cuts could exacerbate the risk of high inflation continuing to exist, or could be misinterpreted as a lack of commitment from decision-makers to the 2% inflation target.

Some people are worried about a sudden drop in stock prices when the market reassesses the prospects of AI.

The minutes show that in discussions regarding financial stability risks, some Federal Reserve officials expressed concern about the “overvaluation of assets” in the financial markets. The minutes stated:

“Some participants commented on the issue of overvaluation of financial market assets, with several participants emphasizing the risk of a disorderly decline in stock prices, especially in the context of the market suddenly re-evaluating the prospects of artificial intelligence (AI) related technologies.”

A couple of attendees also mentioned the risks associated with high corporate debt. These concerns reflect that the Federal Reserve, when formulating monetary policy, is not only focused on inflation and employment but is also closely monitoring financial stability.

Almost unanimous support for ending the tapering, with many supporting an increase in the short bond holdings ratio.

The statement from the last meeting indicated that the FOMC decided to end the balance sheet reduction plan on December 1. This means that the balance sheet reduction, which began on June 1, 2022, will conclude after three and a half years. The Federal Reserve's announcement shows that after halting the balance sheet reduction in December, the principal repayments from the Federal Reserve's agency mortgage-backed securities (MBS) will be reinvested in short-term U.S. Treasury securities, replacing the maturing MBS holdings with short-term Treasury securities.

The minutes of the meeting released this Wednesday show that “almost all” participants believed that stopping the tapering on December 1st is appropriate, or in other words, they all felt they could support this decision.

Some market participants were previously concerned that the Federal Reserve might wait too long to halt the balance sheet reduction, which could lead to fluctuations in overnight financing rates due to liquidity pressures.

The minutes state that the participants unanimously believe that the recent tightening of the currency market indicates that the tapering is about to end.

“Many participants pointed out that a higher proportion of short-term Treasury securities can provide the Federal Reserve with greater flexibility to respond to changes in reserve demand or non-reserve liabilities, thus helping to maintain adequate reserve levels.”

“New Federal Reserve News Agency”: Some decision-makers may feel uneasy about a slight majority regarding the interest rate cut in December.

Nick Timiraos, a senior Fed reporter known as the “New Federal Reserve News Agency,” pointed out in his article that the interest rate cut decision in October has sparked strong opposition to a potential rate cut in December.

Timiraos emphasized in the article that the minutes show a strong divergence of opinions among the FOMC regarding what policy decision should be taken at the next meeting in December, which has made an increasing number of Fed decision-makers—possibly a narrow majority—uneasy about a rate cut in December. He pointed out that this is the largest divergence in decision-making among the FOMC for the next meeting in many years.

Timiraos pointed out that the minutes showed that several Federal Reserve officials opposed the decision to cut interest rates in October at that time, which may include some regional Fed presidents who did not have voting rights at FOMC meetings this year. Meanwhile, other officials who supported the rate cut also indicated they could accept inaction, highlighting the severity of the divisions within the committee.

Timiraos also pointed out that regardless of the decisions made at the December meeting, most Fed officials believe it will be necessary to further cut interest rates in the future.