The minutes of the Federal Reserve meeting are not very "dovish": inflation risks have decreased, and it is appropriate to cut interest rates in 2024, but the path of interest rates is very uncertain and there is still a possibility of raising them.

The recently released meeting minutes show that at last month's monetary policy meeting, Federal Reserve policymakers expressed more confidence in curbing inflation and believed that the risks of inflationary pressures were decreasing. They expect that a rate cut may be appropriate in the next year, but the path of interest rates remains uncertain, leaving the possibility of future rate hikes open. Several policymakers also believe that higher interest rates may persist for a longer period.

The Federal Open Market Committee (FOMC) announced after its meeting on December 14th that it would keep interest rates unchanged for the third consecutive time, while signaling a significant shift in its monetary policy stance from hawkish to dovish in 2024. The dot plot released after the meeting showed that more than half of the Fed officials expect at least three 25 basis point rate cuts next year. The median projection for interest rates in 2024 was lowered by 50 basis points, indicating a total of 75 basis points, or three rate cuts, in the next year.

Federal Reserve Chairman Jerome Powell stated in a press conference after the meeting that it was premature to speculate on when monetary easing would be appropriate, but he revealed that the prospect of a rate cut was clearly discussed during the meeting. Shortly after the meeting, the "number three" at the Fed, New York Fed President John Williams, expressed a hawkish view, stating that it was too early to consider a rate cut in March 2024 and contradicting Powell's remarks by saying that "we haven't really discussed a rate cut" and implying that the market's reaction may have been excessive. Other Fed officials also made hawkish comments in an attempt to dampen market expectations of rate cuts.

Nick Timiraos, a senior Fed reporter known as the "New Fed News Agency," wrote that the minutes of the meeting implied the end of rate hikes but did not provide a timetable for rate cuts. Furthermore, some officials emphasized the risks of overly restrictive interest rates.

Some commentators believe that the dovish tilt of this meeting appears to be much weaker than what Powell expressed in the press conference. Whether it is the high level of uncertainty in the economic outlook or the mention of the impact of excessively loose financial conditions on inflation, none of these support the market's expectation of a total of 150 basis points rate cuts in 2024.

Uncertainty in interest rate path forecast, possibility of further rate hikes, and higher interest rates may persist for longer

The minutes of the December meeting, released on January 3rd, mentioned that "almost all" attending Fed policymakers indicated in their respective submissions that their baseline forecasts suggest that by the end of 2024, it would be appropriate to lower the target range for the federal funds rate, reflecting their improved inflation outlook.In terms of interest rate outlook, the minutes reflect:

"When discussing the policy outlook, participants believed that the policy rate may be at or near the peak of this tightening cycle. However, they noted that the actual policy path will depend on how the economy evolves."

Following the above statement, the minutes state:

Participants also pointed out that their interest rate path forecasts have an "unusually elevated" level of uncertainty and that economic developments may require further rate hikes in the future. Several participants expressed the view that the environment may require keeping rates high for longer than they currently anticipate.

Participants generally emphasized the importance of maintaining a cautious and data-dependent approach to decision-making and reiterated the statement from the November meeting minutes: "Monetary policy is expected to remain restrictive for some time, until inflation clearly moves toward the Committee's symmetric 2 percent objective."

Inflation Risks Reduced, Multiple Warnings of Overly Tight Policy and Economic Downturn

In terms of risk management, the minutes state that participants believe that "inflation risks have diminished," but they also point out that inflation remains well above the Federal Reserve's long-term target of 2% and that there are still risks of price stability progress stagnating. The minutes suggest that Fed policymakers are increasingly concerned about the negative impact of excessive tightening on the economy. The minutes state:

Several participants emphasized the uncertainty regarding how long the restrictive monetary policy stance should be maintained and noted that an overly restrictive stance could pose downside risks to the economy.

Some individuals indicated that the Committee may need to strike a balance between controlling inflation and achieving full employment in the near future.

Some media outlets have suggested that the above mention of striking a balance indicates that the Fed hopes to avoid making sacrifices in the pursuit of achieving a soft landing.

"Clear Progress" in Containing Inflation by 2023

The minutes explicitly acknowledge the Fed officials' achievements in containing inflation. The minutes state that in the discussion on inflation, all participants noted that the FOMC had made "clear progress" in achieving the 2% inflation target by 2023.

At the same time, the minutes state that these participants remain concerned about high inflation continuing to harm American households, especially those who are unable to bear higher prices. Participants pointed out that the inflation rate is still above the FOMC's target, and they need to see more evidence that inflation pressures are easing before they can have confidence that the inflation rate will sustainably return to 2%.

Uncertain Economic Outlook, Excessive Monetary Accommodation May Increase Difficulty in Containing Inflation

Regarding the economic outlook, the minutes stated that there is a high degree of uncertainty among participants. They pointed out that economic activity may be stronger than currently assessed, posing risks to both the economy and inflation.

They also noted that the tightening of the financial environment in the summer of 2023 has eased since the two previous Federal Reserve meetings.

Many participants believe that the degree of monetary accommodation may be beyond an appropriate range, making it more difficult for the Federal Reserve to achieve its inflation target.

Many suggest discussing technical factors in advance, slowing down the pace before stopping balance sheet reduction

The minutes revealed that during last month's meeting, Federal Reserve policymakers discussed when to signal to the public any changes in the reduction of the central bank's balance sheet.

The minutes stated that participants believe it is necessary to discuss technical factors that would guide a slowdown in the pace of balance sheet reduction before making a decision, in order to provide advance notice to the public.

Several participants suggested that it may be appropriate to gradually end the process of balance sheet reduction. They stated that "the balance sheet plan implies slowing the pace of reduction and then stopping it when reserve balances are at a level judged to be sufficient."

These participants recommended that in order to provide appropriate advance notice to the public, the FOMC should start discussing the technical factors that would guide the decision on balance sheet reduction before making the decision itself.