After Trump's election, the wind has changed: The Federal Reserve's minutes indicate that many support a "gradual" rate cut, and officials suggest the possibility of pausing actions

Key Points:

The last minutes stated that if the data meets expectations, it may be appropriate to shift to a more neutral policy, while this time it states that it may be appropriate to gradually shift to a more neutral policy.

The number of policymakers who believe that a gradual rate cut is appropriate due to uncertainty about the neutral rate has changed from "some" to "many."

When discussing adjustments to policy in response to potential changes in risk balance, some policymakers pointed out that if inflation remains high, rate cuts may be paused, while others believe that if the labor market declines, cuts may accelerate.

Almost all policymakers believe that the risks to employment and inflation remain broadly balanced, with some believing that the downside risks to economic activity and the labor market have decreased, and many believing that the risks of a gradual cooling in the labor market since the September meeting have diminished.

Some believe that the ON RRP rate should be adjusted to the lower bound of the federal funds rate.

Policymakers believe that the path of interest rates is not predetermined and depends on data, with many emphasizing the need to focus on potential changes in economic trends when assessing data.

"New Federal Reserve News Agency": The minutes suggest that if progress on inflation stalls, rate cuts will be approached more cautiously; Federal Reserve officials discussed a technical reduction of the ON RRP rate by 5 basis points at the "next meeting."

The recent meeting minutes show that after Trump was elected president earlier this month, the Federal Reserve's stance changed, with "many" policymakers suddenly supporting a more gradual rate cut, and for the first time, officials mentioned the possibility of pausing actions when discussing decision-making risks.

On November 26, Tuesday, Eastern Time, the Federal Reserve released the minutes from the most recent FOMC meeting held on November 7. Wall Street Journal noted that compared to the minutes from the last meeting in September, this time the term "gradual" or similar phrases like "step by step" were used more frequently.

The minutes stated:

In discussing the outlook for monetary policy, this time the participants expect that if the data roughly meets expectations, inflation continues to decline to 2%, and the economy remains close to full employment, then over time, it may be appropriate to gradually shift to a more neutral policy stance.

This time, the minutes almost repeated the relevant predictive statements from the last discussion on the outlook for monetary policy, with the only addition being the word "gradual." Last time, after listing the conditions of data, inflation, and employment, it stated that it was expected to be appropriate to shift to a more neutral policy stance.

Nick Timiraos, a senior journalist known as the "New Federal Reserve News Agency," later wrote that the Federal Reserve minutes suggest that if progress on inflation declines stalls, they will be more cautious about rate cuts.

Many Believe Gradual Rate Cuts Are Appropriate Due to Uncertainty About Neutral Rate

In terms of risk management, this time the minutes, like the last, mentioned the uncertainty surrounding the neutral rate level, with Federal Reserve policymakers supporting gradual rate cuts due to this uncertainty, differing from last time in that this time many hold this view. The minutes stated:

"Many participants pointed out that due to the uncertainty surrounding the neutral rate level, the assessment of the restrictiveness of monetary policy becomes complex, and therefore they believe that it is appropriate to gradually reduce policy restrictions In the last minutes, there was a nearly identical statement regarding the uncertainty of the neutral interest rate, with the only difference being that last time it was "some" participants pointed out.

Some pointed out that if inflation remains high, rate cuts may be paused; if the labor market declines, cuts may accelerate

As expected, the Federal Reserve's FOMC meeting this month cut rates by 25 basis points. What surprised some observers was that the statement from this meeting reiterated that the risks to employment and inflation are generally balanced and firmly committed to supporting full employment, but removed the phrase "more confident in inflation's continued approach to 2%." Some observers speculated that this might hint at the possibility of pausing rate cuts in December.

The minutes showed that, unlike the last minutes, some Federal Reserve officials directly raised the possibility of pausing rate cuts when discussing risk management issues. The minutes stated:

In discussing how to adjust monetary policy to respond to potential changes in risk balance, some participants pointed out that if inflation remains high, the (FOMC) committee may pause easing the policy rate, keeping it at a restrictive level; some participants indicated that if the labor market declines or economic activity slows, the committee may accelerate easing the policy rate.

Many believe the risk of a cooling labor market has decreased since the September meeting

The minutes stated that almost all participants believed that the risks to employment and inflation remain generally balanced. "Some participants judged that the downside risks to economic activity or the labor market have decreased." Participants pointed out that monetary policy needs to balance the risks of easing too quickly, which could hinder further declines in inflation, against the risks of easing too slowly, which could excessively weaken economic activity and employment.

Regarding the outlook for the labor market, participants generally expect that as the Federal Reserve appropriately adjusts its monetary policy stance, the labor market will remain robust.

"Some participants still believe that the risks of labor market deterioration are high, but many participants believe that since the committee's September meeting, the risks of excessive cooling in the labor market have decreased."

Discussion on adjusting the ON RRR rate to the lower bound of the federal funds rate, with a potential 5 basis point cut in the next meeting

When discussing the outlook for monetary policy, this meeting also emphasized that the path of interest rates is not predetermined but depends on data, with many stressing the importance of focusing on potential changes in economic trends when assessing data. The minutes stated:

Participants pointed out that monetary policy decisions are not made along a pre-set path but depend on economic developments, their impact on the economic outlook, and risk balance; they emphasized that the committee must make this clear when adjusting its policy stance. While emphasizing that monetary policy will depend on data, many participants noted that recent economic data has been volatile and stressed the importance of focusing on potential economic trends and changes in outlook when assessing new information The minutes went on to state that some decision-makers believe that the Federal Reserve should consider adjusting the overnight reverse repurchase (ON RRP) rate in the future, making it the lower bound of the policy rate, the federal funds rate.

"Some participants indicated that at a future meeting, if the FOMC considers making a technical adjustment to the rate offered by the ON RRP tool to equal the lower bound of the federal funds rate target range, thereby bringing the rate back to the level it was when the tool was established as a monetary policy instrument, it would be valuable."

The minutes also mentioned that at this meeting, Federal Reserve staff pointed out that lowering the ON RRP rate by 5 basis points would align the ON RRP rate with the bottom of the federal funds rate target range and could exert some downward pressure on other money market rates.

Timiraos from the "New Federal Reserve News Agency" commented that Federal Reserve officials discussed a 5 basis point reduction in the ON RRP rate "at a future meeting," which would be a technical adjustment.