U.S. FOMC Meeting Minutes (December 17-18, 2024)

Fed minutes confirm expectations of slower pace of rate cuts in 2025

• The minutes from the December 17-18th Federal Open Market Committee (FOMC) meeting released today confirmed that, while the committee still expects inflation to move toward 2 percent, there is greater concern than at the prior meeting that progress on inflation has stalled. 
• On the central question of inflation, "participants expected that inflation would continue to move toward 2 percent" but acknowledged that "the process could take longer than previously anticipated". Participants acknowledged the recent higher-than-expected readings on inflation, and some participants observed that the process of slowing inflation may have temporarily stalled. The possibility that potential changes in trade and immigration policy could affect inflation in the future was also noted.
• Participants viewed recent labour market developments as consistent with a gradual easing in labour market conditions, and cited several indicators as supporting this assessment. Importantly, participants "generally noted, however, that there were no signs of rapid deterioration in labor market conditions" and observed that layoffs remained low. 
• On the policy decision, the minutes indicate that the decision to reduce interest rates was supported by a "vast majority" of participants. The majority of participants noted that their judgements in this meeting were "finely balanced", indicating this decision was a close call. Additionally, some participants felt there would have been merit in keeping target rate unchanged, and "suggested that the risk of persistently elevated inflation had increased in recent months". 
• When discussing the outlook for monetary policy, "participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing". Since the beginning of this cycle of rate cuts, this is the first time we have seen such language in the FOMC minutes.

Key Implications

• Today's minutes will serve to firm up market expectations for a slower pace of cuts in 2025. This is in line with our expectations of a rate cut every other meeting in 2025. The minutes reveal a fulsome discussion of recent developments in inflation, and a range of views around the risks to the inflation outlook and the interpretation of recent data. Contrast this with a comparatively brief discussion of the labour market, and general agreement that the labour market is not rapidly deteriorating, and it is no surprise the committee feels it is nearing a point at which rate cuts will slow. 
• Despite the committee's growing confidence that it can begin to reduce rates at a slower pace, it remains true that the only thing that is certain is uncertainty. Uncertainty about potential policy changes was a major discussion point for the participants, and all judged that there was elevated uncertainty regarding the scope, timing, and economic effects of potential changes to trade and immigration policy. Any firm policy decisions when the new administration takes office could alter the FOMC's current thinking, in either direction.

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