The Fed meeting minutes revealed serious disagreement: many believed a December rate cut was inappropriate, and some worried about a disorderly stock market decline.

Original author: Li Dan

Original source: Wall Street News

The minutes of the meeting show that at the most recent monetary policy meeting at the end of last month, Federal Reserve policymakers were seriously divided on whether to cut interest rates in December. Those supporting a rate cut did not have an overwhelming majority. Regarding quantitative easing (QT) to reduce the balance sheet, there was almost unanimous agreement that it should be stopped. On the risk to financial stability, some 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 sharply contrasting views on the most likely policy decision at the December FOMC meeting. Most participants believed that further rate cuts might be appropriate as the Committee gradually shifts to a more neutral policy stance."

"However, some of them suggested that they might not think a further 25 basis point rate cut would be appropriate at the December meeting. Some participants assessed that if economic developments in the next two meetings meet their expectations, a further rate cut in December might be more appropriate. Many participants indicated that, based on their economic outlook, it might be appropriate to keep rates unchanged for the remainder of the year."

All participants agreed that monetary policy is not static, but rather influenced by the latest data, the evolving economic outlook, and the balance of risks.

Media reports indicate that in the counting terminology commonly used in Federal Reserve meeting minutes, the word "many" represents a smaller number than "most/majority." Therefore, the above statement suggests that those opposing another rate cut in December were still a minority at the last FOMC meeting.

In any case, the fact that many people believe there should be no rate cut in December reflects the hawkish tendency within the Fed.

The Federal Reserve's policy statement released after its October 29 meeting showed that the FOMC decided to cut interest rates by 25 basis points for the second consecutive time. However, two of the 12 voters opposed the decision. Unlike previous instances, this time there was disagreement on both the magnitude of the cut and whether to continue. Among the opponents, President Trump's handpicked new governor, Miranda, still wanted a 50 basis point cut, while Kansas City Fed President Schmid supported keeping rates unchanged.

Many believe that raising tariffs this year will have a limited impact on overall inflation, while most believe that cutting interest rates may exacerbate inflation risks.

The hawkish views within the Federal Reserve are reflected in the minutes statement, which mentions discussions on risk management considerations.

Most participants believed that the FOMC's shift to a more neutral policy stance would help prevent 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, given persistently high inflation and a slowly cooling labor market, further rate cuts could exacerbate the risk of persistent high inflation or be misinterpreted as a lack of commitment from policymakers to the 2% inflation target.

Some fear a sharp drop in stock prices when the market suddenly reassesses the prospects of AI.

The minutes show that during discussions about financial stability risks, some Federal Reserve officials expressed concern about "overvaluation of assets" in the financial markets. The minutes state:

“Some participants commented on the issue of overvaluation of financial market assets, and several participants emphasized the risk of disorderly declines in stock prices, especially if the market suddenly reassesses the prospects of artificial intelligence (AI) related technologies.”

Several participants also raised concerns about the risks associated with high corporate debt. These concerns reflect that the Federal Reserve is not only focused on inflation and employment when formulating monetary policy, but also closely monitoring financial stability.

Almost unanimously in favor of ending balance sheet reduction, many support increasing the proportion of short-term debt holdings.

The FOMC's statement at its last meeting indicated that it would end its balance sheet reduction program on December 1st. This means that the balance sheet reduction initiative, which began on June 1, 2022, will conclude after three and a half years. The Fed's announcement shows that after the balance sheet reduction ends in December, the principal from the redemption of 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 the balance sheet reduction on December 1 was appropriate, or that they supported the decision.

Some market participants had previously worried that the Federal Reserve was waiting too long to stop shrinking its balance sheet, which could cause overnight funding rates to fluctuate 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 pointed out that holding a higher proportion of short-term Treasury bonds can 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.”

"The New Fed Watch": A slim majority of policymakers are uneasy about a December rate cut.

Nick Timiraos, a veteran Fed reporter known as the "new Fed mouthpiece," wrote that the October rate cut decision sparked strong opposition to a possible rate cut in December.

In his article, Timiraos emphasizes that the minutes show strong disagreements within the FOMC regarding the policy decision to be made at 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 disagreement within the FOMC regarding its next meeting in many years.

Timiraos points out that the minutes show several Fed officials opposed the October rate cut decision, 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 divisions within the committee.

Timiraos also pointed out that most Fed officials believe further interest rate cuts are necessary for decisions following the December meeting.