More Rate Cuts Likely but “Gradually” — Evening Brief – 11.26.24
Federal Reserve officials anticipated that it would be appropriate to move the central bank’s policy rate to a more neutral stance over time if inflation continues to decline sustainably to 2%, which is the direction they anticipate the economy going, according to the minutes of the Federal Open Market Committee’s November 6-7 meeting.
Additionally, they deliberated on the potential for pausing rate cuts in the event that inflation remains excessively high. “Some participants noted that the committee could pause its easing of the policy rate and hold it at a restrictive level,” according to the minutes.
Policymakers stressed that “policy decisions were not on a preset course and were conditional on the evolution of the economy and the implications for the economic outlook and the balance of risks.”
The Fed is likely to tread cautiously regarding future monetary policy moves as “many” participants said that uncertainties regarding the level of the neutral rate “complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually,” according to the minutes. The neutral rate is the level at which interest rates neither fuel nor hinder U.S. economic activity.
In addition, “almost all participants agreed that risks to achieving the Committee’s employment and inflation goals remained roughly in balance.”
Regarding inflation, FOMC members expressed confidence that inflation is progressing sustainably towards 2%, although a few acknowledged that this process might require more time than previously anticipated.
FOMC officials will convene on December 17-18, at which time they will possess November employment and inflation data prior to making a policy decision. Currently, the market expects the central bank to cut interest rates again in December, with the probability of a 25-basis point rate cut popping up to 59.5% on Tuesday from 52.3% on Monday, according to the CME FedWatch tool. A pause in January now looks likely. The probability the central bank will cut interest rates at that time is just 12.7%.
In the blink of the eye, we go from one dissent (Governor Michelle Bowman at the September meeting) about cutting interest rates to “many” FOMC members thinking a slowdown may be coming and some members now thinking a “pause” in the cutting cycle.