By Steven K. Beckner
(MaceNews) – At their final meeting of 2023, Federal Reserve officials reached a consensus that they had likely raised short-term interest rates as high as they needed to go but they were not eager to begin cutting rates as dramatically as many had hoped, minutes of the Dec. 12-13 Federal Open Market Committee discussions reveal.
The Dec. 12-13 FOMC minutes do not seem to support the more feverish talk about easing that gripped Wall Street late last year. Rather, they suggest that, while the federal funds rate has likely peaked, the FOMC will proceed “carefully” and conditionally in reducing it, with the amount and timing of rate cuts highly dependent on further progress in reducing inflation to the Fed’s 2% target.
There’s no indication in the minutes that the FOMC majority is eager to halt or scale back “quantitative tightening,” but they do say “several participants” want to discuss future conditions for beginning to consider a change in balance sheet shrinkage.
The FOMC minutes say, “participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves.”
Although Fed officials projected the start of rate cuts at some point this year, the minutes give no hint of urgency, saying “their outlooks were associated with an unusually elevated degree of uncertainty and that it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate.”
And the general feeling on the Committee was 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.”
On Dec. 13, the FOMC left the federal funds rate unchanged for a third straight meeting and strongly suggested its policy rate had peaked for this credit cycle after raising it 525 basis points since leaving the zero lower bound in March 2022.
Although the FOMC kept a tightening bias in its policy statement, and although Powell warned rates could be hiked further if inflation fails to moderate further as forecast, participants projected three 25 basis point rate cuts by the end of 2024.
Wall Street took its cue overwhelmingly from the rate cut projections and from selectively chosen Powell utterances, resulting in a record-setting year-end stock market rally. But the minutes seem to suggest that the timing and extent of monetary easing is heavily contingent upon further progress against inflation.
Always crucial policy communication was problematic for the FOMC at the December meeting.
While leaving the funds rate in a 5.25% to 5.5% target range (median 5.3%) on Dec. 13, the FOMC leaned toward further rate hikes by referencing conditions for “determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time.” The word “any” was added to that phrase, and Powell explained that was done to convey the FOMC’s belief that the funds rate is “at or near the peak.”
But Powell equivocated about the policy outlook in his press conference. While saying the FOMC is beginning to think about when to start “dialing back” monetary restraint, he also said, “We are prepared to tighten policy further, if appropriate. We’re committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2% over time and to keeping policy restrictive until we’re confident that inflation is on a path to that objective.”
He welcomed progress in reducing inflation but said “we still have a ways to go. No one is declaring victory. That would be premature. And we can’t be guaranteed of this progress. So, we’re moving carefully in making that assessment of whether we need to do more or not.”
“We’re pleased with the progress, but we see the need for further progress,” Powell said. “And I think it’s fair to say there is a lot of uncertainty about going forward. We’ve seen the economy move in surprising directions, so we’re just going to need to see more, further progress.”
A more dovish message was conveyed by the 19 FOMC participants in their revised, quarterly Summary of Economic Projections. They dropped their previous projection of a 5.6% funds rate by the end of 2023, and projected it will decline by 75 basis points to a median 4.6%% by the end of 2024. That’s 50 basis points lower than in the FOMC’s September SEP, though not as low as financial markets had been hoping for.
After the Dec. 13 announcement sparked a record-breaking stock market rally and a plunge in bond yields, ostensibly alarmed Fed officials pushed back against the dramatic easing of financial conditions by calling rate cut speculation “premature.”
Earlier Wednesday, Richmond Federal Reserve Bank President Thomas Barkin issued some caveats of his own. The 2024 FOMC voter warned the Fed may have to delay cutting rates or even raise them.
If businesses remain able to raise prices, “I fear more will have to happen on the demand side, whether organically or through Fed action, to convince price-setters that the inflation era is over,“ he said, adding that the decline in long-term rates “could stimulate demand in interest-sensitive sectors like housing….. That’s why the potential for additional rate hikes remains on the table.”
Noting that “the range of estimates (in the December dot plot) was pretty wide, from no cuts to as many as six,” Barkin told his audience “to focus less on the rate path and more on the flight path — is inflation continuing its descent and is the broader economy continuing to fly smoothly? Conviction on both questions will determine the pace and timing of any changes in rates.”
The minutes seem to support such cautionary comments, with a wary eye toward easing financial conditions.
“In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves,” they say.
The minutes report that FOMC participants were fairly pleased with improvements on the economic front, particularly with regard to inflation. They “pointed to the decline in inflation seen during 2023, noting the recent shift down in six-month inflation readings in particular, and to growing signs of demand and supply coming into better balance in product and labor markets as informing that view….”
“Several participants remarked that the Committee’s past policy actions were having their intended effect of helping to slow the growth of aggregate demand and cool labor market conditions,” they continue. “They judged that, in combination with improvements in the supply situation, these developments were helping to bring inflation back to 2% over time.”
The minutes add that “most participants noted that, as indicated in their submissions to the SEP, they expected the Committee’s restrictive policy
stance to continue to soften household and business spending, helping to promote further reductions in inflation over the next few years.”
Summarizing the officials’ projections, the minutes note that “almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024.”
But the minutes go on to suggest that the projections are not consistent with hopes for aggressive credit easing: “Participants also noted, however, that their outlooks were associated with an unusually elevated degree of uncertainty and that it was possible that the economy could evolve in a manner that would make further increases in the target range appropriate.”
“Several also observed that circumstances might warrant keeping the target range at its current value for longer than they currently anticipated,” the minutes continue.
And all of the officials agreed that rate cuts would have to hinge on further gains against inflation. “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.”
As usual, “risk-management considerations” were discussed.
“Participants saw upside risks to inflation as having diminished but noted that inflation was still well above the Committee’s longer-run goal and that a risk remained that progress toward price stability would stall,” say the minutes. “A number of participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained, and pointed to the downside risks to the economy that would be associated with an overly restrictive stance.”
The minutes add that “a few suggested that the Committee potentially could face a tradeoff between its dual mandate goals in the period ahead.”
Explaining the wording change in the FOMC statement, the minutes say “Members generally viewed the addition of the word “any” to this sentence as appropriately relaying their judgment that the target range for the federal funds rate was likely now at or near its peak for this policy tightening cycle while leaving open the possibility of further increases in the target range if these were warranted by the totality of the incoming data, the evolving outlook, and the balance of risks.”
Even before the mid-December meeting, bond yields had plunged, and the minutes reflect some misgivings about this in a way that seems to anticipate the push-back officials have expressed since the meeting.
“(P)articipants observed that, after a sharp tightening since the summer, financial conditions
had eased over the intermeeting period,” say the minutes. “Many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for
the Committee to reach its inflation goal.”
Validating Powell’s statement that the FOMC was “not talking about” changing its balance sheet strategy, the minutes say “participants observed that the continuing process of reducing the size of the Federal Reserve’s balance sheet was an important part of the Committee’s overall approach to achieving its macroeconomic objectives and that balance sheet runoff had so far proceeded smoothly.”
Several participants did note that, “amid the ongoing balance sheet normalization, there had been a further decline over the intermeeting period in use of the ON RRP facility and that this reduced usage largely reflected portfolio shifts by money market mutual funds toward higher-yielding investments, including Treasury bills and private-market repo.”
And the minutes say “several participants remarked that the Committee’s balance sheet plans indicated that it would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserves.”
“These participants suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public,” they add.
The minutes disclose that the Federal Reserve Board staff “revised down their inflation forecast, reflecting lower-than-expected incoming data—including the November CPI and producer price index—and their judgment that inflation would be less persistent than in the previous projection.”
“Measured on a four-quarter change basis, total PCE price inflation was expected to be somewhat below 3 percent this year, with core PCE price inflation somewhat above 3 percent. Inflation was projected to move lower in coming years as demand and supply in product and labor markets moved into better alignment; by 2026, total and core PCE price inflation
were expected to be close to 2 percent.”