Federal Reserve cuts interest rates but disagreements remain: The minutes reveal a divergence between rate cuts and a hold stance

Source: BlockMedia Original Title: The Fed lowered interest rates but conflicts remain… Divergence revealed in minutes on rate cuts and hold(Summary) Original Link: On the 30th(local time), the Federal Reserve’s minutes released highlighted “the possibility of additional rate cuts” and the easing of tensions in the short-term funding markets as key issues. At the December meeting, the Fed implemented its third consecutive rate cut, but members were divided over inflation and employment risks. Meanwhile, concerns grew that reserves could fall to the “adequate(ample)” range’s lower end, prompting active management of reserves through short-term Treasury purchases and adjustments to the standing repo facility.

On the 31st(local time), the minutes from the Federal Open Market Committee (FOMC) meeting held on December 9-10 revealed that market participants largely expected a 0.25% point cut in December, with the possibility of two additional cuts next year already priced in. However, changes in wording after the meeting signaled a weakening of the Fed’s confidence regarding the “timing of the next cut.”

“Additional cuts appropriate” majority, “Hold for now” coexist

The minutes summarized that most members believed further cuts would be appropriate if inflation slowed as expected. Conversely, some members stated that rates should be maintained for a “considerable period” after the December cut. The December decision was split 9 to 3, and even among those in favor of a cut, phrases like “the decision was finely balanced” or “could have supported a hold” were included.

The dissenting votes fell into three groups. Stephen Miran preferred a 0.5% point cut, while Oston Goolsbee and Jeff Shamir favored holding rates steady. The projected interest rate path also varied. Out of 19 members, 6 projected the policy rate at the end of 2025 to be between 3.75% and 4%. The median forecast indicated one rate cut in 2026, but individual projections ranged widely.

Curbing tariffs, energy, and inflation expectations

During the meeting, Treasury yields rose slightly within recent ranges, but market-based inflation expectations, especially in the short term, declined. The minutes cited falling energy prices and reassessment by some participants of the impact of tariffs on short-term inflation as reasons for the decline in short-term inflation expectations.

The stock market experienced high volatility without a clear direction, with large-cap tech stocks affected by AI-related issues. The Fed noted that big tech companies accelerated AI investments this year, with some firms financing these investments through increased debt.

The “hidden theme” of this minutes was reserves and repos

The most detailed discussion in the minutes concerned the short-term funding markets and the balance sheet. The Fed assessed that reserves had fallen into the “adequate” range. The average reserve level was about $2.9 trillion, roughly $500 billion below the level at the start of balance sheet reduction in June 2022.

Repo rates fluctuated at high levels, with market participants citing reduced liquidity and large Treasury issuance as main causes. This process also increased the spread between the effective federal funds rate and the interest rate on reserve balances, with recent two-month data showing a noticeable correlation between this spread and reserve levels.

The Fed indicated that if inflows into the Treasury General Account (TGA) increase from mid to late April, reserves could decline sharply. If securities holdings remain unchanged, reserves could fall below the “adequate” range.

Short-term Treasury purchases(RMP) and the abolition of the standing repo “limit”

The Fed judged that it was appropriate to begin reserve management purchases to keep reserves at a sufficient level. The primary target was short-term Treasuries, reflecting an aim to align the system Open Market Account’s (SOMA) composition with the Treasury’s debt issuance.

Respondents to market surveys expected the RMP to start soon, with an average net purchase of about $220 billion over 12 months.

Another major change involved the operation of the standing repo facility. The Fed saw that some participants’ reluctance to use the facility stemmed from “misunderstanding of its purpose,” and committed to clarifying that it is a tool for interest rate control and market functioning. Additionally, the Fed agreed to eliminate the daily total cap of $500 billion. The Fed emphasized that this measure is unrelated to monetary policy stance and is purely a technical adjustment for interest rate management and market functioning.

Key Point – Continued internal division within the Fed

The core issue is that “possibility of further rate cuts” and “preference to hold rates steady” coexist, indicating ongoing division within the Fed. As the risk of reserves falling below the “adequate” range increases, reserve management through Treasury bill purchases is being promoted. The high levels and increased volatility of repo rates, along with upward pressure on the spread between the effective federal funds rate and the interest on reserves, have emerged as short-term funding market issues. The standing repo facility’s purpose was clarified, and the daily total cap of $500 billion was abolished.