The Fed meeting minutes revealed serious divisions: many believe it is not appropriate to cut rates in December, while some are concerned about an orderly fall in the stock market.

Author: Li Dan

The minutes of the meeting show that at the most recent monetary policy meeting at the end of last month, there were serious divisions among Federal Reserve decision-makers regarding whether to cut interest rates in December, with those in favor of a rate cut not having an absolute majority in numbers. Regarding the quantitative tightening (QT) action of reducing the balance sheet, there was nearly unanimous agreement that it should be halted. In terms of risks to financial stability, some are concerned about a disorderly decline in the stock market.

The Federal Reserve meeting minutes released on Wednesday, November 19, Eastern Time, stated:

"When discussing the recent direction of monetary policy, participants expressed markedly different views on the policy decisions that the Federal Open Market Committee (FOMC) is most likely to adopt at its December meeting. Most participants believe that as the committee gradually shifts towards a more neutral policy stance, it may be appropriate to 'further lower interest rates,'

“However, some (several) people hinted that they do not necessarily believe that the December meeting is suitable for another 25 basis points cut. Some (several) participants assessed that if economic developments align with their expectations between the next two meetings, it may be more appropriate to further cut rates in December. Many (Many) participants stated that based on their economic outlook, it may be suitable to keep interest rates unchanged for the remainder of this year.”

All participants unanimously believe that monetary policy is not static, but is influenced by various latest data, changing economic prospects, and the balance of risks.

The media pointed out that in the so-called counting terminology commonly used in the Federal Reserve meeting minutes, the term “many” represents a number lower than “most/majority.” Therefore, the above statement indicates that at the last FOMC meeting, those opposed to another rate cut in December were still in the minority.

Regardless, many believe that the possibility of not lowering interest rates in December reflects the hawkish tendency within the Federal Reserve.

The statement released after the Federal Reserve's meeting on October 29 indicates that the FOMC decided to cut interest rates by 25 basis points for the second consecutive time. However, among the 12 voters, two opposed this rate cut decision. Unlike before, there were disagreements on the extent of the rate cut and whether to take further action. Among the dissenters, new board member Milan, who was “appointed” by President Trump, still hopes for a 50 basis point cut, while Kansas City Fed President George supports holding steady.

Many believe that raising tariffs this year has a limited impact on overall inflation, and most believe that lowering interest rates may exacerbate inflation risks.

The hawkish views within the Federal Reserve are reflected in the minutes statement, which mentioned the discussion of risk management considerations.

Most participants believe that the FOMC's shift to a more neutral policy stance will help avoid a significant deterioration in labor market conditions. “Many participants also believe that, given the increasing evidence suggesting that this year's tariff increases may have a limited impact on overall inflation, the committee should appropriately ease its policy stance to address employment downside risks.”

Most participants pointed out that further interest rate cuts may exacerbate the risk of persistent high inflation in the context of persistently high inflation data and a slowly cooling labor market, or may be misinterpreted as a lack of commitment by policymakers to the 2% inflation target.

Some people are worried that stock prices will plummet when the market suddenly reevaluates the prospects of AI.

The minutes show that in discussions regarding financial stability risks, some Federal Reserve officials expressed concern about the “overvaluation of assets” in the financial markets. The minutes stated:

“Some participants commented on the issue of overvaluation of financial market assets, with several participants emphasizing the risk of a disorderly decline in stock prices, especially in the event of a sudden reassessment of the prospects for artificial intelligence (AI) related technologies.”

A couple of attendees also mentioned the risks associated with high corporate debt. These concerns reflect that the Federal Reserve, when formulating monetary policy, is not only focused on inflation and employment but is also closely monitoring financial stability.

Almost unanimous support for ending the reduction of the balance sheet, with many supporting an increase in the proportion of short-term bond holdings.

The statement from the last meeting indicated that the FOMC decided to end the balance sheet reduction plan on December 1. This means that the balance sheet reduction, which began on June 1, 2022, will conclude after three and a half years. The Federal Reserve's announcement shows that after halting the balance sheet reduction in December, the principal repayments from the Federal Reserve's agency mortgage-backed securities (MBS) will be reinvested in short-term U.S. Treasury securities, replacing the maturing MBS holdings with short-term Treasury securities.

The minutes of the meeting released this Wednesday show that “almost all” participants believed that stopping the tapering on December 1st is appropriate, or in other words, they all felt they could support this decision.

Some market participants were previously concerned that the Federal Reserve might wait too long to halt the balance sheet reduction, which could lead to fluctuations in overnight financing rates due to liquidity pressures.

The minutes state that the participants unanimously believe that the recent tightening of the currency market indicates that the tapering is about to end.

Many participants pointed out that a higher proportion of short-term government bonds held can provide the Federal Reserve with more flexibility to respond to changes in reserve demand or non-reserve liabilities, thereby helping to maintain adequate levels of reserves.

“New Federal Reserve News Agency”: Some decision-makers may feel uneasy about a rate cut in December, potentially holding a slight majority.

Nick Timiraos, a senior Fed reporter known as the “New Federal Reserve News Agency,” pointed out in his article that the interest rate cut decision in October has sparked strong opposition to a potential rate cut in December.

Timiraos emphasized in the article that the minutes show a strong divergence of opinions among the FOMC regarding what policy decision should be taken at the next meeting in December, which has made an increasing number of Fed decision-makers—possibly a narrow majority—uneasy about a rate cut in December. He pointed out that this is the largest divergence in decision-making among the FOMC for the next meeting in many years.

Timiraos pointed out that the minutes showed that several Federal Reserve officials opposed the decision to cut interest rates in October at that time, which may include some regional Fed presidents who did not have voting rights at FOMC meetings this year. Meanwhile, other officials who supported the rate cut also indicated they could accept inaction, highlighting the severity of the divisions within the committee.

Timiraos also pointed out that regarding the decisions after the December meeting, a majority of Federal Reserve officials believe it is necessary to further cut interest rates.