Federal Reserve Meeting Minutes: "Most" officials expect it to be appropriate to continue cutting interest rates after December, with some advocating for "a period" of holding steady.

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Author: Li Dan

Source: Wall Street Journal

The meeting minutes show that, after overcoming significant internal disagreements three weeks ago to decide on further rate cuts, most officials expect that if the downward trend in inflation aligns with their expectations, it would be appropriate to cut rates further in the future. However, some policymakers believe that the rate cut actions should be paused “for some time,” reflecting the Federal Reserve’s cautious attitude toward rate cuts early next year.

On Tuesday, December 30, Eastern Time, the Federal Reserve released the minutes of the December 9-10 monetary policy meeting, which stated that during discussions on the outlook for monetary policy, participants expressed differing views on whether the Federal Open Market Committee (FOMC) has a restrictive policy stance.

“Most” participants believe that if inflation gradually declines as expected, it may be suitable to “cut rates further.”

Regarding the magnitude and timing of further rate cuts, “some” participants indicated that, based on their economic outlook, after this meeting’s rate cut, “it may be necessary to hold the target range for the federal funds rate unchanged for some time.”

“A few” participants pointed out that this approach allows policymakers to assess how the more neutral policy stance recently adopted by the FOMC affects the labor market and economic activity with a lag, while also giving policymakers time to gain more confidence that inflation will return to 2%.

All participants agree that monetary policy is not preset but will be formulated based on the latest data, constantly changing economic outlook, and risk balance.

“Most” participants support a rate cut in December, while a minority might support holding rates steady.

Three weeks ago, as the market expected, the Federal Reserve cut rates by 25 basis points for the third consecutive FOMC meeting, but for the first time in six years, three votes opposed the rate decision. Among the opponents, Trump “designated” Board member Milan continued to advocate for a 50 basis point rate cut, two regional Fed presidents supported holding rates steady, and, as reflected in the dot plot, four non-voting officials also believed rates should remain unchanged, resulting in a total of seven votes against the decision. Based on this number, the Fed experienced its largest internal disagreement in 37 years.

The minutes of this meeting also reveal disagreements within the Fed regarding the December rate cut.

The minutes state that participants noted that inflation has risen since the beginning of this year and remains at a high level, with existing indicators showing that economic activity is expanding at a moderate pace. They observed that employment growth has slowed this year, and the unemployment rate has slightly increased as of September. Participants assessed that recent indicators are consistent with these conditions, and “over the past few months, downside risks to employment have increased.”

Given this context, “most” participants support a rate cut at the December meeting, while “some” lean toward keeping rates unchanged. “Among those supporting a rate cut, a few” implied that this decision was made after careful consideration, or that they might have supported maintaining the target range for the federal funds rate.

Supporters of rate cuts generally believe that this decision is appropriate because downside risks to employment have increased in recent months, while upside risks to inflation have diminished or remained roughly the same since early 2025.

The minutes show that policymakers inclined to hold rates steady in December are concerned about inflation progress. They believe that either inflation has stagnated in its decline this year or that more confidence is needed that inflation can fall back to the Fed’s 2% target. These participants also pointed out that if inflation cannot return to 2% in a timely manner, long-term inflation expectations could rise.

The minutes further mention that “some” participants who support or might support holding rates steady believe that a large amount of labor market and inflation data will be released between the next two FOMC meetings, which will help determine whether a rate cut is necessary. A few participants think that a rate cut in December is unreasonable because the data received between the November and December meetings did not show any significant further softening in the labor market.

Most participants believe that rate cuts help prevent labor market deterioration, while some point out the risks of entrenched inflation.

Although internal disagreements are exposed, the disagreements reflected in these minutes are not as severe as some external sources suggest.

First, the previous November meeting minutes showed that many participants believed it might be appropriate to hold rates steady this year, while several thought further rate cuts were suitable. Nick Timiraos, a senior Fed reporter known as the “New York Fed News Agency,” pointed out that “many” refers to a larger number than “several,” and most officials still believe rates should be cut in the future, whether or not in December.

The current minutes show that at the December meeting, most participants supported a rate cut that month, including some officials who previously leaned toward pausing rate cuts.

Second, the minutes also reveal significant disagreement among Fed policymakers on whether inflation or unemployment poses a greater threat to the U.S. economy. Most believe that rate cuts help avoid labor market deterioration. The minutes state:

“When discussing risk management factors that could influence the outlook for monetary policy, participants generally believe that upside risks to inflation remain high, and downside risks to employment are also elevated and have increased since mid-2025. Most” participants indicate that shifting to a more neutral policy stance would help prevent a severe deterioration of the labor market. Many of these participants also believe that current evidence suggests the likelihood of tariffs causing sustained high inflation pressures has decreased."

In contrast, officials supporting no rate cuts emphasize inflation risks. The minutes state:

“Several” participants pointed out the risk of inflation becoming entrenched and believe that further reductions in policy rates amid high inflation data could be misinterpreted as a weakening of the committee’s commitment to the 2% inflation target. They believe that risks need to be carefully weighed, and all agree that maintaining solid long-term inflation expectations is crucial to achieving the committee’s dual mandate.

Reserve balance has fallen to sufficient levels

At the December meeting, the Fed, as expected by Wall Street, initiated reserve management (RMP), deciding to buy short-term government bonds at year-end to address pressures in the money market. The statement from that meeting read:

“The (FOMC) believes that the reserve balance has fallen to a sufficient level and will begin purchasing short-term government bonds as needed to maintain ample reserve supplies.”

The minutes of this meeting also reaffirmed that the condition for initiating RMP is that the reserve balance has reached a sufficient level. The minutes state:

During discussions on the balance sheet, participants unanimously agreed that “the reserve balance has fallen to a sufficient level,” and that “the FOMC will purchase short-term government bonds as needed to maintain ample reserve supplies.”