The recent minutes of the Federal Reserve’s open market committee meetings show an unusual level of uncertainty among officials about whether the economy is ready for interest rate cuts. Federal Reserve Bank of Richmond President Tom Barkin assured the public that the possibility of raising interest rates “is still on the table.” Some Federal Reserve officials suggested changing the inflation target rate from 2%, which could cost the Federal Reserve its credibility.
Uncertainty About Interest Rate Cuts in 2024
While market watchers have quickly reacted to the prospect of anticipated interest rate cuts in the future, new documents show uncertainty among some Federal Reserve officials who may not be quick to cut interest rates in 2024. Minutes from the Federal Open Market Committee meeting on December 12-13 indicated that “almost all” participants in the meeting believe the federal funds rate will decrease in 2024. However, there is “an unusually high degree of uncertainty” about how to achieve this, according to the meeting notes. Some members believe it may be necessary to keep interest rates higher, or even raise them again, to bring inflation down to the Federal Reserve’s target rate of 2%.
Division of Opinion on Interest Rate Cuts
The meeting minutes revealed that there is still a divide among members regarding whether it is time to cut interest rates. In remarks to the Raleigh Chamber of Commerce, Richmond Federal Reserve President Tom Barkin stated that committee members anticipated that there might not be any cuts to interest rates at least six times this year.
Possibility of a Soft Landing but Uncertain
Barkin stated that a “soft landing” for the economy, where inflation returns to around 2% without an economic slowdown, is “increasingly possible but not necessarily so.” There is a risk that high interest rates could lead to a contraction in consumer and business borrowing, resulting in an economic slowdown that leads to a “hard landing” that officials at the Federal Reserve are seeking to avoid. Similarly, the U.S. economy could experience “no landing,” where a strong labor market keeps consumer spending at robust levels.
Controlling Inflation and the Risks of Changing Targets
Barkin stated that the “first shot” at inflation is not the solution to excessive inflation. For this reason, Barkin believes that “the possibility for additional interest rate increases is still on the table.” If inflation does not ease to 2%, the meeting minutes showed that some members believe a compromise should be reached and suggested raising the inflation target. This would allow the central bank to cut interest rates earlier and avoid potential economic harm. Barkin said that would be a mistake. “Credibility is the central bank’s main asset. Changing the target before achieving it undermines that credibility,” he said.
Source: https://www.investopedia.com/fed-meeting-minutes-show-division-on-interest-rate-path-8422035
Leave a Reply