Most Federal Reserve officials wanted to keep borrowing costs high “for some time”, according to minutes of their meeting in December, adding to doubts that the US central bank is poised to begin cutting interest
rates as early as March.

While officials expressed optimism that the Fed was quelling inflation, they were also careful not to commit to any immediate loosening of monetary policy, according to a record of the meeting published yesterday.

Rate-setters “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably towards the committee’s objective”, the minutes showed.

Rate-setters surprised markets last month by indicating they expected the bank to make three quarter-point cuts over the course of this year. While officials still viewed rates as “as likely at or near [their] peak”, they also saw “an unusually elevated degree of uncertainty” in this year’s economic outlook.

The account highlights the challenges facing the Fed as it tries to call time on a campaign of aggressive rate rises, without renouncing its commitment to keeping price pressures under control and risking damage to its inflation-fighting credentials.

“They’re not willing to say ‘we’ve won’,” said David Kelly, chief global strategist at JPMorgan Asset Management, referring to the Fed’s battle against inflation. The central bank’s officials appeared from the minutes to be a “rather gloomy, worried bunch”, he added.

Nomura economist Jeremy Schwartz said the minutes showed “a lack of conviction” among Fed officials that they had conquered inflation. “That seems out of line with the early and rapid pace of cuts the market is currently pricing in.”

Despite their caution, policymakers acknowledged the outlook for inflation was “moving towards greater balance”. An earlier reference from previous minutes to inflation remaining “unacceptably high” was removed.

Investors appeared unsurprised by the account in the Federal Open Market Committee (FOMC) minutes. Yields on the US government’s benchmark 10-year bond were 0.04 percentage points lower at 3.91 per cent on Wednesday afternoon in New York, while the policy-sensitive two-year yield was flat at 4.32 per cent. Bond yields rise as their prices fall.

In equity markets, the S&P 500 maintained an earlier decline to trade 0.6 per cent lower on the day. The technology-heavy Nasdaq Composite index was down 1 per cent.

Futures markets continued to price in roughly six interest rate cuts for 2024 as a whole, despite the Fed’s official “dot plot” projections indicating just three cuts.

Fed watchers continue to debate when the bank will begin lowering borrowing costs this year and how deeply it will cut rates through the year.

“So long as the economy remains strong, or solid, they will, I think, remain on the sidelines,” said Kelly. “A first cut in June is my reading of their summary of economic projections.”

The dovish tone of the December meeting and chair Jay Powell’s comments immediately after it led many investors to bet that cuts could start as soon as the vote in mid-March.

FOMC officials have warned since the meeting that a move to slash rates was far from a done deal, however.

“The pushback from Fed officials has been somewhat tepid. Nobody has come out and said ‘we won’t cut in March’. But the suggestion that the market pricing is a little bit aggressive is out there,” said Citi economist Andrew Hollenhorst. “And that’s consistent with what we’ve seen in the minutes today.”

Richmond Fed president Thomas Barkin, a voting member of the FOMC this year, warned yesterday that the quest to beat back inflation was not complete, saying that some companies did not yet “want to back down from raising prices until their customers or competitors force their hands”.

“If that’s the case, I fear more will have to happen on the demand side, whether organically or through Fed action, to convince price-setters that the inflation era is over,” he said, adding that a soft landing was “increasingly conceivable” but “in no way inevitable”.

Barkin’s comments pushed yields on 10-year Treasuries above 4 per cent for the first time since the December meeting, although the move had largely reversed by midday in New York.

Bond prices have started the year on the back foot after a strong year-end rally that pushed the benchmark 10-year yield as low as 3.78 per cent last week, spurred by the Fed’s unexpectedly dovish tone at the meeting.

On Wednesday, federal data showing that job openings in November fell to the lowest level in more than two years offered some evidence of cooling in the labour market, bolstering expectations of rate cuts.

December’s decision from the central bank left the federal funds rate at 5.25 per cent to 5.5 per cent — a 22-year high.

The return of double-digit inflation to the US for the first time in decades dented the Fed’s reputation, prompting policymakers to resort to four successive 75 basis point rises in interest rates. In total, the Fed raised rates by 525 basis points over 2022 and 2023.

However, price pressures declined sharply during the second half of last year and the Fed has not raised rates since July.

The resilience of the US economy last year, as inflation fell despite strong growth and low unemployment, has raised hopes of a soft landing.

The FOMC’s December projections showed most officials expected rates would end 2024 between 4.5 per cent and 4.75 per cent. Most officials expect rates to fall farther in 2025, ending the year between 3.5 per cent and 3.75 per cent.

Those dot-plot projections are built on the core Personal Consumption Expenditures index falling to 2.4 per cent this year and 2.2 per cent in 2025, before hitting the central bank’s 2 per cent goal in 2026. Unemployment is expected to tick up only slightly, from 3.8 per cent now to 4.1 per cent.

Written by: Claire Jones in Washington and Harriet Clarfelt in New York. Additional reporting by Jennifer Hughes in New York.

© Financial Times