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Fed minutes released: Rate cuts likely, but path highly uncertain
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Meeting date December 12th-13th
1. Vote to keep Federal Funds Rate unchanged at 5¼ to 5½ percent was unanimous.
2. Rates are at or near peak; the committee added the word ‘any’ into the following sentence from the FOMC statement to convey this: “the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time.” However, future monetary policy decisions will remain data dependent - door still left open to further hikes if warranted.
3. Participants generally perceived a high degree of uncertainty surrounding the economic outlook.
4. Members agreed that the most likely scenario would include rate cuts in 2024. However, they observed that circumstances might warrant keeping the Fed Funds target range at present levels for longer than currently anticipated and that a restrictive stance should be maintained for 'some time' until the Fed are confident of achieving their target. Despite this, they also acknowledged the risk of an overly restrictive stance.
5. The Committee remains committed to 2% inflation target and need more evidence of a sustainable move towards this. The minutes mention the Fed potentially having a tradeoff in their dual mandate.
• The Fed’s dual mandate is for maximum employment and stable prices. Thus, this is either them saying they may need to run unemployment higher so that they can achieve their inflation target or they will accept higher inflation in order to prevent further loosening of the labor market.
• Considering they are unwavering in their 2% target and the minutes mention that supply chain and labor supply issues appear to have resolved (stating that further progress on inflation may need to come as a result of reduction in demand for products and labor) it sounds like they are referring to the former scenario.
6. 'All participants observed that clear progress had been made in 2023 toward their 2 percent inflation objective.' Although, risks around the inflation forecast were seen as skewed to the upside by Fed Staff.
7. Data suggests growth of economic activity had slowed from its strong pace in the third quarter
8. Job gains slowing but remain strong, unemployment remains low. Labor supply and demand moving towards better alignment. However, several participants noted that if labor market demand were to weaken substantially further it could transition quickly from a gradual easing to a more abrupt deterioration.
9. Usage of the overnight reverse repo facility continued to fall – down about $1.3 trillion since early June. The decline was put down largely to money market funds investing in Treasurys rather than parking their money at the Fed.
10. Financial conditions eased between the December meeting and the prior FOMC meeting. 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.
11. 'Several participants noted that the weakness in gross domestic income (GDI) growth relative to GDP growth over the past few quarters may suggest that economic momentum during that period was not as strong as indicated by the GDP readings.'
12. Several members noted that discussion of how the Federal Reserve slows and then stops its balance sheet run off (QT) should happen well before it actually is implemented. They did not indicate that they were near the cessation or slowing of QT, merely broaching the topic of discussion for planning purposes. $Invesco QQQ Trust(QQQ.US)$ $SPDR S&P 500 ETF(SPY.US)$ $Dow Jones Industrial Average(.DJI.US)$ $Nasdaq Composite Index(.IXIC.US)$ $S&P 500 Index(.SPX.US)$
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