Federal Reserve officials met in December to discuss the potential for interest rate cuts in 2024, according to minutes from the meeting released on Wednesday. While the officials agreed to hold the benchmark rate steady in a range between 5.25% and 5.5%, they indicated that three quarter-percentage point cuts could be expected by the end of 2024.

The minutes highlighted a high level of uncertainty surrounding the timing and likelihood of these rate cuts, stating that the policy rate is likely at or near its peak for this tightening cycle. The decision to cut rates will depend on the future course of the economy. Despite progress in battling inflation and easing supply chain factors that contributed to a surge in mid-2022, officials remain cautious about the potential need to maintain a restrictive monetary policy stance if inflation does not cooperate.

In their projections, almost all participants suggested that a lower target range for the federal funds rate would be appropriate by the end of 2024. However, the minutes also emphasized the "unusually elevated degree of uncertainty" in the policy path. Some members expressed the possibility of keeping the funds rate at an elevated level depending on inflation and conditions, while others discussed the potential for additional rate hikes.

Markets, on the other hand, expect the central bank to aggressively cut rates in 2024. Fed funds futures trading points towards six quarter-point cuts this year, which would take the fed funds rate down to a range between 3.75% and 4%. This rate primarily influences overnight loans between banks and consumer debt products.

Federal Reserve officials also addressed the reduction of bond holdings on the central bank's balance sheet. The minutes indicated that discussions would begin ahead of winding down the process when bank reserves are "somewhat above the level judged consistent with ample." These discussions will ensure that the public is provided with ample notice regarding the winding down of the process.

Earlier on Wednesday, Richmond Fed President Thomas Barkin expressed caution about the overall policy, acknowledging the number of risks in guiding the economy towards a soft landing. The minutes also noted "clear progress" against inflation, with a six-month measure of personal consumption expenditures indicating that the inflation rate has dipped below the Fed's 2% target. However, progress has been uneven across sectors, with energy and core goods moving lower but core services continuing to rise.

Overall, the Federal Reserve appears to be considering interest rate cuts in 2024, but the decision will be contingent upon economic factors and the progression of inflation. The cautious approach towards monetary policy decisions reflects the uncertainty and challenges associated with achieving a sustained decline in inflation while balancing the needs of the labor market and overall economic stability.

Source: CNBC