- 2024-06-22
- News
Fed Minutes: Many Support "Gradual" Rate Cuts
The last minutes indicated that if the data aligns with expectations, it might be appropriate to shift towards a more neutral policy; this time, it is suggested that a "gradual" shift towards a more neutral policy might be suitable.
Due to the uncertainty of the neutral interest rate, policymakers who believe a gradual rate cut is appropriate have increased from "a few" to "several".
When discussing adjustments to policy in response to potential changes in the balance of risks, some policymakers pointed out that if inflation remains high, rate cuts might be paused, while others believe that if the labor market declines, rate cuts might be accelerated.
Almost all policymakers believe that the risks to employment and inflation remain broadly balanced, with some suggesting that the downside risks to economic activity and the labor market have diminished, and several noting that the risk of the labor market cooling too much since the September meeting has decreased.
Some believe that the ON RRP rate should be considered for adjustment to the lower bound of the federal funds rate.
Policymakers believe that the path of interest rates is not preset and depends on data, with several emphasizing the importance of focusing on potential changes in economic trends when assessing data.
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"The New Fed Reporter": The minutes suggest that if progress on inflation stalls, rate cuts will be approached with more caution; Fed officials discussed a technical reduction of 5 basis points in the ON RRP rate at "a future meeting".
The latest meeting minutes show that after the beginning of this month, the Fed's stance has changed, with "several" policymakers suddenly supporting a more gradual rate cut, and for the first time, an official mentioned the possibility of pausing action when discussing decision-making risks.
On Tuesday, November 26th, Eastern Time, the Fed released the minutes of the most recent FOMC meeting, which ended on November 7th. Wall Street Journal noticed that compared to the minutes of the previous September meeting, the term "gradual" or similar phrases like "step-by-step" were used more frequently in these minutes.
The minutes state:
When discussing the outlook for monetary policy, participants in this meeting expected that if data broadly aligns with expectations, with inflation rates continuing to decline to 2% and the economy remaining close to full employment, then over time, it might be appropriate to gradually shift towards a more neutral policy stance.
This set of minutes almost repeats the relevant predictive statements written in the last discussion on the outlook for monetary policy, with only one additional word "gradual" compared to the last time. The previous one stated that it might be appropriate to shift towards a more neutral policy stance after listing the conditions for data, inflation, and employment.
Senior journalist Nick Timiraos, known as "The New Fed Reporter," later wrote that the Fed minutes imply that if progress on inflation stalls, the approach to rate cuts will be more cautious.
Several people believe that a gradual rate cut is appropriate due to the uncertainty of the neutral interest rate
In terms of risk management, this set of minutes, like the last, supports a gradual rate cut due to the uncertainty of the neutral interest rate level, but unlike the last time, this time it is several people who hold this view. The minutes state:
"Many participants pointed out that due to the uncertainty of the neutral interest rate level, the assessment of the restrictive degree of monetary policy has become complex, so they believe it is appropriate to gradually reduce policy restrictions.
There was an almost identical statement in the last minutes regarding the uncertainty of the neutral interest rate, the difference being that it was "some" participants who pointed it out last time.
Some pointed out that if inflation remains high, rate cuts might be paused; if the labor market declines, rate cuts might be accelerated
This month, as expected by the market, the Fed's FOMC meeting cut rates by 25 basis points, surprising some observers. The meeting statement reiterated that the risks to employment and inflation are broadly balanced and is firmly committed to supporting full employment, but removed the phrase "more confident that inflation will continue to move towards 2%." Some observers speculated that this might imply the possibility of pausing rate cuts in December.
This set of minutes shows that, unlike the last minutes, when discussing risk management issues, some Fed officials directly proposed possible scenarios for pausing rate cuts. The minutes state:
When discussing how to adjust monetary policy to respond to potential changes in the balance of risks, some participants pointed out that if inflation remains high, the (FOMC) committee may pause easing policy rates and maintain them at a restrictive level; some participants stated that if the labor market declines or economic activity slows down, the committee may accelerate easing policy rates.
Several people believe that the risk of the labor market cooling too much since the September meeting has decreased
The minutes state that almost all participants believe that the risks to employment and inflation remain broadly balanced. "Some participants judged that the downside risks to economic activity or the labor market have diminished." Participants pointed out that monetary policy needs to balance the risks of easing policy too quickly and too slowly, the former of which may hinder further declines in inflation, and the latter may excessively weaken economic activity and employment.
Regarding the outlook for the labor market, participants generally expected that the labor market would remain robust as the Fed appropriately adjusts its monetary policy stance.
"Some participants still believe that the risk of a worsening labor market is high, but many participants believe that since the committee's September meeting, the risk of the labor market cooling too much has decreased."
Discuss adjusting the ON RRR rate to the lower bound of the federal funds rate, and a 5 basis point cut at the next meeting
When discussing the outlook for monetary policy, this meeting also emphasized that the path of interest rates is not preset but depends on data, with several people emphasizing the importance of focusing on potential changes in economic trends when assessing data. The minutes state:
Participants pointed out that monetary policy decisions do not follow a preset course but depend on economic development, the impact on the economic outlook, and the balance of risks; they emphasized that the committee must make it clear when adjusting its policy stance. Although emphasizing that monetary policy will depend on data, many participants pointed out that recent economic data has been volatile and emphasized the importance of focusing on potential economic trends and changes in the outlook when assessing new information.
The minutes then state that some policymakers believe that the interest rate of the Fed's monetary policy tool, the overnight reverse repurchase (ON RRP), should be considered for adjustment in the future to make it the lower bound of the policy rate, the federal funds rate.
"Some participants stated that at a future meeting, if the (FOMC) committee considers a technical adjustment to the interest rate provided by the ON RRP tool to make the rate equal to the lower bound of the federal funds rate target range, thus returning the rate to the level when the tool was established as a monetary policy tool, it would be valuable."
The minutes also mention that at this meeting, Fed staff pointed out that reducing the ON RRP rate by 5 basis points would align the ON RRP rate with the bottom of the federal funds rate target range and could exert some downward pressure on other money market interest rates.
"The New Fed Reporter" Timiraos commented that Fed officials discussed a 5 basis point reduction in the ONRRP rate, which is a technical adjustment, "at a future meeting."
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