As inflation trends lower, Federal Reserve officials are becoming increasingly confident that the U.S. is reaching the end of its current tightening cycle.
Federal Open Market Committee (FOMC) participants noted last month that upside risks to inflation had mostly “diminished” and that an “overly restrictive stance” in 2024 would present downside risks for the U.S. economy, according to the minutes from the U.S. Central Bank’s December 12-13 meeting.
While several participants acknowledge the outsized risks associated with further interest rate increases, most stressed the importance of maintaining a “careful and data-dependent approach” to policy decisions.
For instance, FOMC members say they will hold monetary policy at a more restrictive level if inflation begins to rebound higher. As of December, the headline inflation reading was 3.1%, well above the Fed’s 2% target but below the peak inflation reading of 9.1% recorded back in June 2022.
“The directionality for the Fed is clear as falling inflation is pushing it toward a rate cut,” wrote SGH Macro Advisors Chief U.S. Economist Tim Duy, per Reuters.
According to the minutes, which are released 3 weeks after every FOMC meeting, nearly all participants project rate cuts by the end of 2024. The latest Summary of Economic Projections indicates that the median participant has penciled in 3 rate cuts by the end of the year.
In their December 12-13 policy discussions, FOMC participants agreed that recent economic indicators supported the notion of rate cuts in 2024. The Committee highlighted the easing economic growth in the fourth quarter compared to the third quarter, as well as moderating job gains in the U.S., the low unemployment rate, and the declining inflation readings.
“In light of the policy restraint in place, along with more favorable data on inflation, participants generally viewed risks to inflation and employment as moving toward greater balance,” the Minutes said. “However, participants remained highly attentive to inflation risks.”
The Bureau of Labor Statistics will release its inflation data for December on January 11 at 8:30 a.m.
