Fed 'likely' done with rate hikes, concerned with 'uncertainty': minutes

Members of a key Federal Reserve committee forecasted rate cuts in 2024 but noted “an unusually elevated degree of uncertainty” as it weighs its next move, according to new minutes from its December meeting released Thursday.

The committee voted to hold interest rates at their highest level in more than two decades following its final meeting of 2023. But Fed officials, including Chair Jerome Powell, signaled rate cuts were on the horizon following the announcement.

“We are likely at or near the peak rate for this cycle,” Powell said at press conference last month, sending markets soaring.

The new minutes add fuel to forecasts that the Fed is likely done with rate hikes.

"In discussing the policy outlook, [FOMC] participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves,” according to the minutes.

“Participants pointed to the decline in inflation seen during 2023, noting the recent shift down in six-month inflation readings in particular, and to growing signs of demand and supply coming into better balance in product and labor markets as informing that view."

Inflation has dropped significantly to 3.1 percent in November 2023 from its 9 percent peak in June 2022, according to the latest consumer price index (CPI) report by the Bureau of Labor Statistics. The bureau’s December inflation reading is expected next Thursday.

Markets have priced in seven quarter-point rate cuts by the Fed in 2024, far outstripping the Fed’s own cautious forecast. But all but three members of the 12-person FOMC anticipated at least two rate cuts in 2024, according to economic projections released following last month’s meeting.

“In their submitted projections, almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024,” the new meeting minutes said.

The Fed is already being lauded for pulling off the rare soft landing, but the job is not done. Inflation remains above the Fed’s 2 percent target, and the meeting minutes noted risks including holding rates too high for too long, eroding household balances and a slowing global economy.

While unemployment has remained below 4 percent for its longest stretch in decades, participants also “noted the risk that, if labor demand were to weaken substantially further, the labor market could transition quickly from a gradual easing to a more abrupt downshift in conditions."