The Fed meeting minutes revealed serious disagreement: many believed a December rate cut was inappropriate.

Li Dan, Wall Street Insights

The minutes of the Federal Reserve meeting show that at the monetary policy meeting at the end of last month, policymakers were seriously divided on whether to cut interest rates in December. The number of people who believed that there was no need to cut interest rates this year did not reach a majority, but it exceeded the number of people who supported cutting interest rates. Some centrists would decide based on the data. Regarding the quantitative tightening (QT) action to reduce the balance sheet (quantitative tightening), there was almost unanimous agreement that it should be stopped. Regarding the risks to financial stability, some people were worried about a disorderly decline in the stock market.

The minutes of the Federal Reserve meeting released on Wednesday, November 19th, Eastern Time, stated: "In discussing the near-term direction of monetary policy, participants expressed very different views on the most likely policy decision at the December meeting of the Federal Reserve Committee (FOMC). Most participants believed that further rate cuts might be appropriate as the Committee gradually shifts to a more neutral policy stance." "However, some suggested that they might not believe a further 25 basis point rate cut would be appropriate at the December meeting. Some participants assessed that if economic developments between the next two meetings met their expectations, a further rate cut in December might be more appropriate." "Many participants indicated that, based on their economic outlook, maintaining the current interest rate for the remainder of the year might be appropriate." All participants agreed that monetary policy is not static but is influenced by various latest data, the evolving economic outlook, and the balance of risks. Media outlets pointed out that in the so-called counting terminology commonly used in Federal Reserve meeting minutes, the word "many" represents fewer people than "most/majority." Therefore, the above statement shows that those opposing another rate cut in December were still a minority at the last FOMC meeting. Nick Timiraos, a senior Fed reporter known as the "new Fed mouthpiece," pointed out that the minutes mentioned "many" officials who believed a rate cut in December was unnecessary, exceeding the number of officials who thought a rate cut was more likely. However, most officials still believed that a rate cut should be made in the future, regardless of whether it is in December. In summary, overall, most Federal Reserve officials believe that interest rates will be cut in the future, regardless of when. This includes centrists who will decide whether to cut rates in December based on data; many believe that no further rate cuts are necessary this year, while several believe that a rate cut is appropriate. The camp advocating against a December rate cut does not represent a majority, but its number exceeds that of the camp supporting a December rate cut. The FOMC's statement released after its October 29th meeting showed that the FOMC decided to cut rates for the second consecutive time by 25 basis points, but two of the 12 voters opposed this decision. Unlike previous instances, this time there was disagreement on both the magnitude of the rate cut and whether to continue. Among the opponents, President Trump's handpicked new governor, Milan, still hopes for a 50 basis point rate cut, while Kansas City Fed President Schmid supports keeping rates unchanged. Many believe that tariff increases this year will have a limited impact on overall inflation. Most believe that interest rate cuts may exacerbate inflation risks. The hawkish view within the Federal Reserve is reflected in the minutes statement, which mentions that when discussing risk management considerations, most participants believed that the FOMC's shift to a more neutral policy stance would help avoid a significant deterioration in labor market conditions. "Many participants also believed that, given mounting evidence that tariff increases this year may have a limited impact on overall inflation, the Committee should appropriately ease its policy stance to address downside risks to employment." Most participants pointed out that against the backdrop of persistently high inflation and a slowly cooling labor market, further interest rate cuts could exacerbate the risk of persistent high inflation, or could be misinterpreted as a lack of commitment to the 2% inflation target. Some worried about a potential stock market crash if the market suddenly reassessed the prospects of AI. The minutes show that in discussions about financial stability risks, some Federal Reserve officials expressed concern about “overvaluation of assets in financial markets.” The minutes state: “Some participants commented on the issue of overvaluation of assets in financial markets, and several participants emphasized the risk of a disorderly decline in stock prices, especially if the market suddenly reassesses the prospects of artificial intelligence (AI) related technologies.” A couple of participants also mentioned the risks associated with high corporate debt. These concerns reflect that the Federal Reserve, in formulating monetary policy, not only focuses on inflation and employment but also closely monitors financial stability. Almost unanimous support for ending balance sheet reduction; many support increasing the proportion of short-term debt holdings. The FOMC statement from the last meeting indicated that it decided to end the balance sheet reduction program on December 1st. This means that the balance sheet reduction program, which began on June 1, 2022, will end after three and a half years. The Fed's announcement shows that after stopping balance sheet reduction in December, the principal redeemed from the Fed's agency mortgage-backed securities (MBS) will be reinvested in short-term U.S. Treasury securities, replacing maturing MBS holdings. The meeting minutes released this Wednesday show that "almost all" of the participants believed that stopping balance sheet reduction on December 1st was appropriate, or in other words, they all believed that this decision was acceptable. Some market participants had previously worried that the Fed's delay in stopping balance sheet reduction could lead to fluctuations in overnight funding rates due to liquidity pressures. The minutes stated that participants unanimously agreed that the recent tightening of money market conditions indicated that the balance sheet reduction was nearing its end. "Many participants noted that a higher proportion of short-term Treasury holdings would provide the Federal Reserve with more flexibility to respond to changes in reserve requirements or non-reserve liabilities, thereby helping to maintain adequate reserve levels." Nick Timiraos, a senior Fed reporter known as the "new Fed mouthpiece," wrote that the October rate cut decision triggered strong opposition to a possible December rate cut. In his article, Timiraos emphasizes that the minutes show strong disagreement within the FOMC regarding the policy decision for its next meeting in December. This has made a growing number of Fed policymakers—perhaps a narrow majority—uneasy about a December rate cut. He points out that this is the largest division within the FOMC regarding its next meeting in years. Timiraos notes that the minutes show several Fed officials opposed the October rate cut decision at the time, possibly including some regional Fed presidents who did not have voting rights at FOMC meetings this year. Other officials who supported the rate cut also indicated they could accept inaction, highlighting the severity of the internal divisions within the committee. Timiraos further notes that regardless of the decision at the December meeting, most Fed officials believe further rate cuts are necessary in the future.