Potential Cutbacks Amid Prevailing Caution

During their mid-December meeting, FED officials maintained the reference rate within the range of 5.25% to 5.5%. It was observed that the new projections hinted at the possibility of a series of cutbacks totaling three-quarters of a percentage point (75 bps) throughout the year.

Within this context, the meeting minutes unveiled that nearly all participants expressed the notion that, reflecting improvements in their inflation outlooks, it would be appropriate to establish a lower target range for the federal funds rate by the end of 2024. Emphasis was placed on the progress made in reducing inflation and in balancing the labor market, albeit with recognition that these tasks remain ongoing.

However, the minutes also indicated a degree of uncertainty about how or if this would occur, as “members considered that the reference rate is likely to be at or near its peak for this adjustment cycle. Nevertheless, the path of monetary policy will depend on how the economy evolves.” Specifically, some members mentioned the possibility of maintaining the reference rate at an elevated level if inflation does not continue its downward trajectory. Other officials left open the possibility of additional increases contingent on evolving conditions. Participants underscored the importance of maintaining a careful, data-dependent approach in making future decisions. They reaffirmed that it would be appropriate for the policy stance to remain on a tightening path for some time, until inflation is clearly declining sustainably toward the Committee’s 2% long-term objective.

In line with this cautious perspective, the President of the Federal Reserve Bank of Richmond, Thomas Barkin, recently expressed caution about monetary policy, highlighting the inherent risks in attempting to guide the economy toward a “soft landing.”

The FED will make its first announcement of the year on January 31st, with widespread anticipation that the reference rate will remain unchanged.

Expectations for the Federal Funds Rate

Source: JP Morgan

Leave a Reply

Your email address will not be published. Required fields are marked *