Fed minutes suggest interest rates have peaked, but timing of cuts still debated

Fed officials are telling the market that rates have peaked. They're just not ready to say when they'll start cutting.

Jan 4, 2024 - 07:30

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Fed minutes suggest interest rates have peaked, but timing of cuts still debated

Federal Reserve officials suggested interest rates have likely peaked, according to details of their December policy meeting. But they remained uncertain as to how long rates should remain at current levels to ensure that inflation returns to the central bank's preferred 2% target.

At the Fed's policy meeting that ended on Dec. 13, officials agreed to hold the central bank's policy rate steady at between 5.25% and 5.5%. The minutes highlighted both the downside risks to the domestic economy should rates remain elevated for too long, while agreeing that near-term reductions will likely be necessary as inflation pressures ease.

The Fed's new Summary of Economic Projections from the December meeting, better-known as the dot plots, suggested the federal funds rate will fall by 75 basis points, or 0.75 percentage point, next year. That's a sharp pivot from recent comments that had indicated a higher-for-longer rates stance.

The projections showed that Fed officials see core PCE prices, its preferred inflation gauge, easing to 2.4% by the end of this year, with GDP growth falling to 1.4%. Headline unemployment, Fed officials forecast, will rise to around 4.1%.

"In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for the tightening cycle, though they noted that the actual policy path will depend on how the economy evolves," the minutes read.

"Participants discussed several risk-management considerations that could bear on future policy decisions ... (noting) upside risks to inflation as having diminished but noted that inflation was still well above the Committee’s longer-run goal and that a risk remained that progress toward price stability would stall," the minutes said.

U.S. stocks were modestly lower following the release of the minutes at 2 p.m. Eastern Time, with the Dow Jones Industrial Average down 208 points on the session and the S&P 500 falling 32 points even amid a downtick in Treasury yields.

Benchmark 10-year note yields were pegged at 4.292% while 2-year notes changed hands at 4.355%. The dollar index, which tracks the greenback against a basket of six global currencies, was up 0.51% to 102.721.

CME Group's FedWatch now indicates a 64.5% chance that the Fed will cut rate at its March meeting, down from around 75% at then end of last week, with the odds of a follow-on cut in May pegged at 55.9%.