jakiro
Li Dan, Wall Street Insights
The minutes of the Federal Reserve meeting showed that at the monetary policy meeting at the end of last month, policymakers had serious disagreements on whether to cut interest rates in December. The number of people who believed that no further interest rate cuts were necessary this year did not reach the majority, but it exceeded the number of people who supported interest rate cuts. Some centrists depended on the data. Regarding the quantitative tightening (QT) operation of reducing the balance sheet (shrinking the balance sheet), there was almost complete consensus that it should be stopped; in terms of risks to financial stability, some people are worried about the disorderly decline of the stock market.
The minutes of the Federal Reserve meeting released on Wednesday, November 19th, Eastern Time, read:
“In discussing the near-term direction of monetary policy, participants expressed sharply differing views on the most likely policy decisions at the (Monetary Policy) Committee’s (FOMC) December meeting. Most participants believed that as the Committee gradually moves toward a more neutral policy stance, “further interest rate cuts may be appropriate,”
“However, some of them (several) suggested that they did not necessarily think that the December meeting would be suitable for another 25 basis points cut. Some (several) participants assessed that if the economy develops in line with their expectations between the next two meetings, December may be more suitable” for further rate cuts.”Many participants said that based on their economic outlook, it may be appropriate” to keep rates on hold for the remainder of the year.
All participants agreed that monetary policy is not static but will be influenced by the latest data, the changing economic outlook and the balance of risks.
The media pointed out that in the so-called counting terms commonly used in Federal Reserve meeting minutes, the word “many” represents a lower number of people than “most/majority”.Therefore, the above statement shows that at the last FOMC meeting, those who opposed another interest rate cut in December were still in the minority.
Nick Timiraos, a senior Fed reporter known as the “New Fed News Service”, pointed out that “many” officials mentioned in the minutes believe that it is not necessary to cut interest rates in December, and the number of people who hold this view exceeds “several” officials who believe that a rate cut is more likely to be appropriate.But most officials still believe that interest rates should be cut in the future, whether in December or not.
To sum up, overall, the majority of Fed officials believe that interest rates will be cut in the future, no matter when. This includes centrists who will depend on data to decide whether to cut interest rates in December; many believe that there may be no need to cut interest rates again this year, and some think that a cut is appropriate. The camp that advocates no interest rate cut in December does not reach the majority, but the number of people who support a rate cut in December exceeds the camp that supports an interest rate cut in December.
The decision statement released after the Federal Reserve meeting on October 29 showed that the FOMC decided to cut interest rates by 25 basis points for the second consecutive time. However, two of the 12 voters opposed the decision to cut interest rates.Different from the previous ones, this time there are differences on the intensity of interest rate cuts and whether to continue the action.Among the opponents, Milan, the new governor “hand-picked” by US President Trump, still hopes to cut interest rates by 50 basis points, while Kansas City Fed President Schmid supports keeping the policy unchanged.
Many people believe that raising tariffs this year will have limited impact on overall inflation. Most people believe that cutting interest rates may intensify the risk of inflation.
The hawkish view within the Fed was reflected in the minutes’ statement that when discussing risk management considerations,
Most participants believed that the FOMC’s shift to a more neutral policy stance would help avoid a possible significant deterioration in labor market conditions.”Many of these participants also believed that the Committee should relax its policy stance appropriately to address downside risks to employment, given growing evidence that higher tariffs this year may have a limited impact on overall inflation.”
Most participants noted that with inflation data remaining high and the labor market slowly cooling, further interest rate cuts could exacerbate the risk of persistent high inflation, or could be misinterpreted as policymakers’ insufficient commitment to the 2% inflation target.
Some worry that stock prices will plummet when the market suddenly reassesses the prospects for AI.
The minutes showed that during discussions on financial stability risks, some Fed officials expressed concern about “overvalued assets” in financial markets.The minutes read:
“Some participants commented on the issue of overvaluation of assets in financial markets, with several participants highlighting the risk of a potentially disorderly decline in stock prices, particularly if markets suddenly reassess the prospects for artificial intelligence (AI)-related technologies.”
A couple of participants also mentioned the risks associated with high levels of corporate debt.These concerns reflect the fact that the Fed not only focuses on inflation and employment when setting monetary policy, but also closely monitors financial stability conditions.
There is almost unanimous support for ending the balance sheet reduction, and many people support increasing the proportion of short-term debt positions.
The statement from the last meeting stated that the FOMC decided to end the balance sheet reduction plan on December 1.This means that the balance sheet reduction operation that began on June 1, 2022 will end after three and a half years.The Federal Reserve announced that after it stops shrinking its balance sheet in December, the redemption principal of the Federal Reserve’s agency mortgage-backed securities (MBS) will be reinvested in short-term U.S. Treasury bonds, and the maturing MBS holdings will be replaced by short-term Treasury bonds.
The minutes of the meeting released on Wednesday showed that “almost all” participants believed that it was appropriate to stop shrinking the balance sheet on December 1, or that they all believed that they could support this decision.
Some market participants had been worried that the Fed waited too long to stop shrinking its balance sheet, which could cause overnight funding rates to fluctuate due to liquidity pressure.
The minutes stated that participants agreed that the recent tightening of money market conditions indicated that the balance sheet reduction was about to end.
“Many participants noted that holding a higher proportion of short-term Treasury securities could help maintain adequate reserve levels by providing the Fed with more flexibility to respond to changes in reserve requirements or non-reserve liabilities.”
“New Fed Newswire”: A slim majority of policymakers may be uneasy about December rate cut
Nick Timiraos, a senior Fed reporter known as the “New Federal Reserve News Agency”, wrote that the decision to cut interest rates in October triggered strong opposition to a possible interest rate cut in December.
Timiraos emphasized in the article that the minutes showed that the FOMC expressed strongly different views on what policy decisions should be taken at the next meeting in December, which made more and more Fed policymakers-possibly a narrow majority-uneasy about cutting interest rates in December.He pointed out that this was the most divergent time in years for the FOMC to decide on the next meeting.
Timiraos pointed out that the minutes showed that several Fed officials opposed the decision to cut interest rates in October, possibly including some local Fed chairmen who did not have the turn to vote at the FOMC meeting this year.Other officials who support a rate cut have said they would be fine with no action, underscoring the depth of divisions within the committee.
Timiraos also pointed out that regardless of the decision at the December meeting, most Fed officials believe that further interest rate cuts are necessary in the future.
