Fed Meeting Minutes: "Most" Officials Expect Further Rate Cuts Appropriate After December, Some Advocate Holding Steady for "Some Time"

Original Author: Li Dan

Original Source: Wall Street Insights

Meeting minutes revealed that while overcoming significant internal disagreements to decide on a rate cut three weeks ago, most officials anticipated that if the disinflation trend aligns with their expectations, further rate cuts would be appropriate in the future. However, some policymakers believed the rate-cutting actions should be paused "for some time," reflecting the Federal Reserve's cautious stance towards rate cuts early next year.

On Tuesday, December 30th, Eastern Time, the Federal Reserve released the minutes from its December 9-10 monetary policy meeting. The minutes stated that during discussions on the monetary policy outlook, participants expressed differing views on whether the policy stance of the Federal Open Market Committee (FOMC) was restrictive.

"Most participants judged that if inflation continued to move gradually lower, it would likely be appropriate to" cut rates further.

Regarding the magnitude and timing of further rate cuts, "some" participants indicated that based on their economic outlook projections, "it might be appropriate to maintain the target range for the federal funds rate unchanged for some time" following the rate cut at this meeting.

"A few participants noted that this approach would allow policymakers to assess the lagged effects of the Committee's recent move to a more neutral policy stance on the labor market and economic activity, while also giving policymakers time to gain greater confidence that inflation is returning to 2 percent.

All participants agreed that monetary policy is not on a preset course and will be formulated based on the latest data, the evolving economic outlook, and the balance of risks."

"Most" Participants Supported the December Rate Cut, with a Minority Potentially Supporting Holding Steady

Three weeks ago, the Fed, as market expected, cut rates by 25 basis points for the third consecutive FOMC meeting. However, it was the first time in six years that three votes dissented against the rate decision. Among the dissenters, Governor Michelle Bowman, appointed by Trump, continued to advocate for a 50-basis-point cut, while two regional Fed presidents favored holding rates steady. Combined with the dot plot indicating that four non-voting officials also believed rates should remain unchanged, effectively seven individuals opposed the decision. Given this number, the Fed experienced its largest internal division in 37 years.

The minutes from this meeting also exposed divisions within the Fed's policymaking ranks regarding the December rate cut.

The minutes stated that participants noted inflation had risen since the beginning of the year and remained elevated, with current indicators showing economic activity expanding at a moderate pace. They observed that job growth had slowed this year, and the unemployment rate had increased slightly through September. Participants assessed that recent indicators were consistent with these developments, and "downside risks to employment had increased over recent months."

Given this backdrop, "most" participants supported the rate cut at the December meeting, while "some" favored maintaining the rate unchanged. "Among participants supporting a rate cut, a few indicated that the decision was a close call, or that they could have supported maintaining the target range for the federal funds rate."

Participants supporting the rate cut "generally viewed the decision as appropriate because downside risks to employment had increased over recent months, while upside risks to inflation had diminished or remained roughly unchanged since early 2025."

The minutes showed that policymakers leaning towards no rate cut in December were concerned about the inflation process. They either believed progress on disinflation had stalled this year or felt greater confidence was needed that inflation would return to the Fed's 2% target. These participants also noted that if inflation did not return to 2% in a timely manner, longer-term inflation expectations could rise.

The minutes then mentioned that "some" participants who supported, or could have supported, holding steady believed that a substantial amount of labor market and inflation data would be released during the intermeeting period before the next two FOMC meetings, which would help assess the need for rate cuts. "A few" participants viewed a December rate cut as unwarranted because data received between the November and December meetings did not show any clear further weakening in the labor market.

Most Participants Believed Rate Cuts Would Help Prevent Labor Market Deterioration; Some Pointed Out Risks of Entrenched Inflation

Although revealing internal divisions, the divisions reflected in these minutes were not as severe as some outsiders had suggested.

First, the minutes from the previous meeting in November showed that at that FOMC meeting, "many" participants believed it might be appropriate to maintain the rate unchanged within the year, while "several" believed it would be appropriate to continue cutting rates. Nick Timiraos, a senior Fed reporter known as the "new Fed whisperer," pointed out that "many" represents a larger number than "several," but "most" officials still believed rates should be cut in the future, whether in December or not.

These minutes show that at the December meeting, "most" participants supported a rate cut that month, including some officials who had previously leaned towards pausing cuts this month.

Second, the minutes also show that Fed policymakers at the December meeting had considerable disagreement over whether inflation or unemployment posed a greater threat to the U.S. economy. Most believed rate cuts would help avoid a deterioration in the labor market. The minutes stated:

"In discussing risk-management considerations that could affect the monetary policy outlook, participants generally viewed upside risks to inflation as remaining elevated and downside risks to employment as elevated and having increased since mid-2025. Most participants noted that moving to a more neutral policy stance would help guard against the possibility of a significant deterioration in the labor market. Many of these participants also judged that available evidence suggested the likelihood that tariffs would lead to persistently high inflationary pressures had diminished."

In contrast, Fed officials supporting no rate cut emphasized inflation risks. The minutes stated:

"Several participants noted the risk that elevated inflation could become entrenched and judged that lowering the policy rate further in the context of elevated inflation data could be misinterpreted as signaling a weakening of policymakers' commitment to the 2 percent inflation objective. Participants agreed that risks needed to be weighed carefully and that well-anchored longer-term inflation expectations were essential for achieving the Committee's dual mandate."

Reserve Balances Have Declined to Ample Levels

At the December meeting, the Fed, as Wall Street anticipated, initiated the Reserves Management Purchases (RMP) program, deciding to purchase short-term Treasury securities at year-end to address money market pressures. The meeting statement at the time read:

"The Committee judges that reserve balances have declined to ample levels and will begin purchasing short-term Treasury securities as needed to maintain ample reserve supplies on an ongoing basis."

These minutes also reiterated that reserve balances had reached the level triggering the RMP. The minutes stated:

In discussing issues related to the balance sheet, participants agreed that "reserve balances have declined to ample levels," and the FOMC "will begin purchasing short-term Treasury securities as needed to maintain ample reserve supplies on an ongoing basis."