At the November Federal Open Market Committee (FOMC) meeting, which maintained the benchmark interest rate for the second consecutive time, it was confirmed that there was no discussion regarding rate cuts. The majority of attendees expressed caution due to concerns that inflation could surge again. They also decided to maintain a sufficiently restrictive monetary policy stance until the 2% inflation target is achieved.
According to the minutes of the September FOMC regular meeting released by the Federal Reserve (Fed) on the 21st (local time), all attendees stated, "While discussing policy outlooks, it is important to maintain monetary policy sufficiently restrictive until inflation returns to the 2% target." Earlier, the Fed had held the U.S. interest rate steady at 5.25-5.5% during the FOMC meeting from October 31 to November 1 and indicated that additional rate hikes could be implemented if necessary.
The minutes did not include any discussions related to the rate cuts that the market had been expecting. Attendees judged that financial conditions had tightened considerably over recent months and that inflation had continued to ease. However, "most attendees continued to recognize the risk of rising inflation," pointing out that inflation still exceeds the 2% target and could rise further at any time. Following the FOMC meeting, Fed Chair Jerome Powell also highlighted these concerns during a press conference, stating that "rate cut discussions are not being considered."
The minutes emphasized that "the committee is in a position to proceed cautiously," and "attendees need to see a lot of data indicating that inflationary pressures are easing to be confident that inflation will return to the 2% target." They also noted, "Due to ongoing momentum in economic activity, disinflation may stall or inflation may accelerate again," adding, "If future information confirms that current policies are insufficient to achieve the inflation target, it would be appropriate to tighten monetary policy further."
Since last year, the Fed has raised U.S. interest rates by more than 5 percentage points, emphasizing "careful decisions" amid the risks of both excessive tightening and insufficient tightening. The minutes confirmed, "Decisions will be made by comprehensively considering the risk balance between over-tightening and under-tightening, along with economic outlooks and indicators."
The economy is expected to slow significantly in the fourth quarter. The minutes forecast, "Risks to economic growth are tilted to the downside, while risks to inflation are tilted to the upside," and predicted "a significant slowdown in economic growth in the fourth quarter." They also reiterated the high uncertainty surrounding economic forecasts. Factors contributing to this uncertainty include the cumulative effects of tightening policies and worsening financial conditions on households and businesses, the possibility of a federal government shutdown, and the burden of resuming student loan repayments.
The market still predominantly expects the rate to remain unchanged in December, although the odds of a hold have slightly weakened. According to the Chicago Mercantile Exchange (CME) FedWatch tool, after the release of the FOMC minutes, the probability of a December rate hold in the federal funds futures market dropped to the mid-90% range. Conversely, the probability of a baby step (a 0.25 percentage point rate hike) increased from 0% to the mid-5% range.
Sam Stovall, strategist at CFRA Research, said, "We believe rates will remain higher for longer than the market expects." Quincy Crosby, senior strategist at LPL Financial, assessed, "There will be a disconnect between the market that believes the Fed has implicitly declared a 'dovish pivot' and the market that expects rate cuts by summer 2024 if economic growth slows more noticeably."
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