All participants agreed that monetary policy is not static but is influenced by various latest data, changing economic outlooks, and risk balances.

Author: Li Dan

The meeting minutes show that at the most recent monetary policy meeting at the end of last month, Federal Reserve policymakers had significant disagreements about whether to cut rates in December, with those supporting a rate cut not holding an absolute majority. There was almost unanimous agreement on halting the quantitative tightening (QT) actions related to reducing the balance sheet. Regarding financial stability risks, some expressed concerns about a disorderly decline in the stock market.

The Federal Reserve's meeting minutes released on Wednesday, November 19, stated:

"When discussing the recent direction of monetary policy, participants expressed starkly different views on the policy decision the Federal Open Market Committee (FOMC) is most likely to take at its December meeting. Most participants believed that as the Committee gradually shifts to a more neutral policy stance, it may be appropriate to 'further cut rates.'

"However, several indicated that they do not necessarily believe it is appropriate to cut rates by 25 basis points at the December meeting. Some participants assessed that if economic developments align with their expectations between the next two meetings, it may be more appropriate to 'further cut rates' in December. Many participants indicated that based on their economic outlook, it may be appropriate to 'maintain rates unchanged' for the remainder of the year.

All participants agreed that monetary policy is not static but is influenced by various latest data, changing economic outlooks, and risk balances.

The media pointed out that in the so-called counting terminology commonly used in the Federal Reserve's meeting minutes, the term "many" represents a number lower than "most" or "majority." Therefore, the above statements indicate that those opposing another rate cut in December were still in the minority at the last FOMC meeting.

In any case, the belief that many think a rate cut in December may not be appropriate reflects a hawkish tendency within the Fed.

The resolution statement released after the Federal Reserve's meeting on October 29 showed that the FOMC decided to cut rates by 25 basis points for the second consecutive time, but among the 12 voters, two opposed this rate cut decision. Unlike before, there were disagreements this time regarding the magnitude of the rate cut and whether to continue taking action. Among the opponents, the newly appointed governor, who was "handpicked" by President Trump, still hoped for a 50 basis point cut, while Kansas City Fed President Esther George supported holding steady.

Many believe this year's tariff increases have limited overall inflation impact, while most believe rate cuts may exacerbate inflation risks.

The hawkish views within the Federal Reserve are reflected in the minutes, which mention that when discussing risk management considerations,

most participants believed that the FOMC's shift to a more neutral policy stance would help avoid a significant deterioration in labor market conditions. "Many participants also believed that given the increasing evidence suggesting that this year's tariff increases may have limited effects on overall inflation, the Committee should appropriately ease its policy stance to address downside risks to employment."

Most participants pointed out that in the context of persistently high inflation data and a slowly cooling labor market, further rate cuts could exacerbate the risk of sustained high inflation or could be misinterpreted as a lack of commitment by policymakers to the 2% inflation target.

Some are concerned about a sudden reassessment of AI prospects leading to a sharp decline in stock prices.

The minutes show that during discussions about financial stability risks, some Federal Reserve officials expressed concerns about "overvaluation of financial market assets." The minutes stated:

"Some participants commented on the issue of overvaluation of financial market assets, with several emphasizing the risk of disorderly declines in stock prices, especially in the event of a sudden reassessment of the prospects for artificial intelligence (AI) related technologies."

A couple of participants also mentioned risks associated with high corporate debt. These concerns reflect that the Federal Reserve is not only focused on inflation and employment when formulating monetary policy but is also closely monitoring financial stability conditions.

Almost unanimous support for ending balance sheet reduction; many support increasing short-term debt holdings.

The statement from the last meeting indicated that the FOMC decided to end the balance sheet reduction plan on December 1. This means that the balance sheet reduction, which began on June 1, 2022, will conclude after three and a half years. The Fed's announcement indicated that after halting the balance sheet reduction in December, the principal repayments from the Fed's agency mortgage-backed securities (MBS) will be reinvested in short-term U.S. Treasury securities, replacing maturing MBS holdings with short-term Treasuries.

The minutes released this Wednesday showed that "almost all" participants believed that stopping the balance sheet reduction on December 1 was appropriate, or in other words, all believed they could support this decision.

Some market participants had previously expressed concerns that the Fed might wait too long to stop the balance sheet reduction, potentially leading to fluctuations in overnight financing rates due to liquidity pressures.

The minutes stated that participants unanimously believed that the recent tightening of money market conditions indicated that the balance sheet reduction was nearing its end.

"Many participants pointed out that a higher proportion of short-term Treasury holdings could provide the Fed with more flexibility to respond to changes in reserve demand or non-reserve liabilities, thereby helping to maintain adequate reserve levels."

"New Federal Reserve News Agency": A narrow majority of decision-makers feel uneasy about a rate cut in December.

Nick Timiraos, a senior Fed reporter known as the "New Federal Reserve News Agency," wrote that the rate cut decision in October sparked strong opposition to a potential rate cut in December.

Timiraos emphasized in his article that the minutes show the FOMC expressed strong differing views on what policy decision should be taken at the next meeting in December, leading to an increasing number of Fed decision-makers—possibly a narrow majority—feeling uneasy about a rate cut in December. He noted that this is the largest divergence in decision-making within the FOMC regarding the next meeting in years.

Timiraos pointed out that the minutes indicated that several Federal Reserve officials opposed the rate cut decision in October, possibly including some regional Fed presidents who did not have voting rights at the FOMC meetings this year. Other officials who supported the rate cut also indicated they could accept inaction, highlighting the severity of the divisions within the Committee.

Timiraos also noted that regarding decisions after the December meeting, most Federal Reserve officials believe it is necessary to further cut rates.

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