Fed Minutes Continue to Indicate Rate Cuts Expected in 2024, But Uncertainty Looms

The minutes from the March 19-20, 2024 Federal Open Market Committee (FOMC) continue to highlight the progress that the Fed has made on reining in price pressures, but also acknowledged the upside risks to the inflation outlook.

When discussing the recent inflation readings, Committee members noted that, “the recent increase in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberration.” At the same time, Committee members noted that the path to 2% would likely be uneven.

When discussing the appropriate policy actions, “all participants judged that, in light of current economic conditions, the outlook for economic activity and inflation, and the balance of risks, it was appropriate to maintain the target range for the federal funds rate at 5¼ to 5½ percent.”

On the future path of policy, “almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected.” Additionally, participants noted that the policy rate was likely at its peak for the cycle.

When discussing the risks associated with the future path of interest rates, FOMC members stated that it was important to continue to “weigh the risks of maintaining a restrictive stance for too long” versus “the risks of easing policy too quickly”.

Key Implications

The Fed minutes continue to be a focal point of financial markets with investors trying to get a better sense of the path for interest rates. Today’s minutes reinforced the Fed’s data dependent approach to reducing its policy rate stating, “they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent”. While FOMC members have acknowledged that the path to 2% will be “uneven”, a string of inflation prints that have surprised to the upside serve as a reminder that the fight against inflation has yet to be won. This has been reflected in financial markets, which now expect around 40 basis points in rate cuts this year, fewer than the 75 basis points of the median FOMC participant.

While economic activity has continued to expand at a healthy pace underscored by recent data prints, progress on curtailing inflation has stalled. At the same time, medium-term inflation expectations have been drifting higher. This has brought a divide among FOMC members on the totality and timing of rate cuts in 2024. Nonetheless, with the risks to employment and inflation coming into better balance, it keeps the door open for a July rate cut, but continued persistence in inflation poses a risk to this view.