Federal Reserve officials discussed interest rate cuts last month and hinted at an end to hikes

(CNN) – Federal Reserve meeting minutes released Wednesday show that Federal Reserve officials discussed cutting interest rates at a meeting last December.

Officials' latest economic forecasts released in December showed they expect to cut interest rates this year for the first time since a historic campaign to curb inflation began in March 2022.

The central bank has seen significant improvement since then: Inflation is now below 3%, according to the central bank's preferred measure of inflation, the personal consumption expenditure price index, well below the four-decade peak it reached. In the summer of 2022.

While some officials were cautious about upside risks to inflation during the December meeting, they also acknowledged that the central bank's key interest rate “will remain at or near its peak during this tightening cycle,” according to meeting minutes.

“The current stance of monetary policy has been restrained and appears to be restraining economic activity and inflation,” Fed officials commented, but “the economy may have grown to make further increases in the target range appropriate.” Officials felt that “until inflation clearly moves steadily toward the group's target, it is appropriate for policies to remain restrained for some time.”

Wall Street is poised to cut interest rates

Wall Street is eager for a rate cut, with some investors pricing in this first cut of the spring. However, officials have come out to temper this optimism, stressing that there are still risks that could devastate the deflationary defeat.

Markets currently see a 63% chance of the first rate cut in the spring, according to futures. The timing and pace of interest rate cuts appear to differ between the Fed and Wall Street. For example, JPMorgan expects 5 quarterly basis point cuts starting in June this year, compared to the average of 3 cuts that central bank officials estimate by 2024.

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Goldman Sachs expects to begin cutting interest rates in March, but some officials, such as New York Fed President John Williams, have said the central bank is not yet seriously considering cutting interest rates.

“The cuts may not be as severe as people think, and interest rates may remain high for a while,” Callie Cox, U.S. investment analyst at eToro, wrote in a note on Wednesday. “While this is a good sign for the future of the economy, it may limit 'animal spirits', which refer to irrational factors and emotions that influence decision-making and economic behavior, which we have seen in the markets recently,” he added.

Minutes of Wednesday's meeting showed that central bank officials want to see a steady trend of easing inflation before cutting interest rates. So far, investors have scoffed at any dovish comments from officials who say additional interest rate hikes are still on the table.

The Fed's last mile against inflation could be tough. The U.S. economy is likely to end 2023 on a strong note, with fourth-quarter GDP expected to expand more than 2% and add more than 100,000 jobs in December, according to FactSet estimates.

But are the terms available?

The level and path of inflation is the main determining factor in lowering interest rates, but officials examine many other aspects of the economy. Personal consumption expenditures fell on a monthly basis in November for the first time in more than three years. Annual inflation was 2.6% in November, still above the 2% target, but a significant improvement from the four-decade high of 7.1% in June 2022. Excluding food and energy prices, it was 3.2% in November. Compared to previous year.

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By other measures, inflation has already fallen below the 2% threshold. On a six-month annualized basis, the price index for core personal consumption expenditures rose 1.9% in November, the first time the measure fell below 2% in more than three years.

However, the central bank is yet to declare victory, but has signaled a slight turnaround. The central bank's latest policy statement, published last month, indicated that a range of data and other factors must be considered to determine whether “any” further policy tightening is appropriate.

Officials are looking more broadly at economic activity, as strong growth could make the central bank's job of controlling inflation harder. Officials acknowledged that gross domestic product, a broad measure of economic output, had been “slow” since the summer.

Inflation is also likely to halt recession.

“When I talk to institutions, I continue to hear a lot of plans for higher-than-usual rate hikes,” Richmond Fed President Thomas Parkin said Wednesday during an event in Raleigh, North Carolina.

“With decades of price non-fixation, companies, especially those facing margin pressures, are unwilling to back down from raising prices until their customers or competitors force them to,” he said.

“It will take more action from the central bank to convince rate-setters that the era of inflation is over,” Parkin added.

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