Fed minutes: debate gradual approach to cutting rates

A significant number of senior officials of the Federal Reserve (Fed) considered that a more gradual approach to cut interest rates was justified due to high inflation and uncertainty about the appropriate level of borrowing costs, according to new documents.

At their last meeting in early November, Fed officials debated how quickly they should cut interest rates, given new evidence showing persistent inflation and a stronger-than-expected economy.

Although at the meeting of November 6 and 7 agreed to cut rates by a quarter of a percentage pointthere was less consensus on how aggressive they should be in the coming months.

“Many participants noted that uncertainties about the level of the neutral interest rate complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce the restriction more gradually,” the meeting minutes state. November.

What the minutes revealed

The neutral interest rate is one that neither stimulates nor slows US economic growth. Until recently, Fed officials estimated that this rate was below 3%. However, now some W officials and economistsAll Street believes it could be significantly above 3%.

Currently, the Fed’s federal funds rate is in a range between 4.5% and 4.75%. The Fed began cutting interest rates in September, marking the first cut since the pandemic, with an initial reduction of half a percentage point. This was followed by a quarter-point cut in October, accompanied by signs of sustained reductions over the next year and a half.

However, Fed officials are now questioning the speed of these cuts, following a recent spike in inflation.

Some members suggested at the last meeting that the central bank could pause cuts if inflation remains elevated, especially given that the labor market appears to have stabilized. A few months ago, the Fed’s main concern was the labor market, due to a significant increase in the unemployment rate and a sharp slowdown in hiring. These concerns have diminished.

Meanwhile, the annual rate of inflation, based on the Fed’s preferred PCE price index, fell to 2.1% in September, slightly above the long-term target of 2%. However, economists estimate it could rise to around 2.5% by the end of the year.

The president of the Fed, Jerome Powelland other top officials described the elevated inflation readings as a “bump” and anticipate more bumps in the future. Despite this, they remain confident that inflation will slow towards the 2% target by 2026.

“The data received in general remains consistent with inflation that returns sustainably to 2%,” the minutes indicate. For their part, Wall Street investors now believe the Fed will make fewer rate cuts in 2025 than initially expected.

An additional concern is that President-elect Trump’s policies, such as imposing harsh tariffs and deporting millions of unauthorized immigrants, could exacerbate inflation.

More aggressive rate cuts could also stimulate the economy, putting more upward pressure on inflation before the Fed reaches its 2% target.

Fed officials will meet Dec. 17-18 to decide whether to cut interest rates again. Wall Street is betting on another cut in the last month of the year, followed by a pause in January.