The minutes of the Federal Open Market Committee (FOMC) meeting on December 12-13, released Wednesday, stated: "Members believe that policy interest rates may reach or be near the peak of this tightening cycle."
Officials “reaffirmed that it would be appropriate to maintain restrictive policies for some time until inflation clearly comes to a sustainable halt.”
Nevertheless, officials also praised the recent efforts to combat inflation. The committee is prepared to cut interest rates in 2024 if inflation continues to fall, although it did not give a clear indication.
The minutes stated: “In the forecasts submitted, most Committee members indicated improvements in the inflation outlook. The underlying forecasts implied that the end of 2024 would be a suitable time for a low interest rate environment.”
At its December meeting, the Fed kept interest rates at 5.25%-5.5% for the third consecutive time. Meanwhile, the FOMC statement left open the possibility of another interest rate hike.
The FOMC's less pessimistic stance stimulated a recovery in US stocks and bonds, prompting a loosening of financial conditions.
Laura Rosner-Warburton, senior economist at Macropolicy Perspectives LLC, assessed: “They are ready to pivot. They see a soft landing ahead, and they are willing to do so as long as inflation continues at a moderate level.”
However, the FOMC members' individual views on the federal funds rate at the end of 2024 vary widely. The Fed's "dot chart" shows that eight officials believe two cuts of 1/4 point or less are needed, while eleven officials anticipate cuts of 3 points or more.
An adjustment in the statement following the December meeting also reflects a shift in policymakers' attitudes. The FOMC will monitor a range of data and developments to adjust policy accordingly.
For their part, derivative markets predict the Federal Reserve will cut interest rates six times this year, with the first cut of 25% coming in March. However, some Fed officials have dismissed this expectation.
The FOMC will meet again on January 30-31 to discuss policy.
FED Chairman Jerome Powell stated it was too early to declare victory, although he confirmed that officials had discussed when to "withdraw."
"Some FOMC members still acknowledge the risk of recession due to a weakening labor market... They will begin cutting interest rates in the first quarter of this year in an effort to avoid an economic recession," said Bloomberg economist Stuart Paul.
The Fed's inflation gauge showed prices rose just 1.9% in November 2023 on a six-month annual basis. This marks the first time in over three years that the gauge has slipped below the Federal Reserve's 2% target.
Meanwhile, the US labor market remains relatively healthy despite high interest rates.
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