Will the Federal Reserve's meeting minutes released tonight continue to send "hawkish" signals?

Last month, the Federal Reserve's "hawkish rate cut" shook the market, and internal disagreements among officials have emerged. Tonight's meeting minutes will reveal clues about the rate cut path for 2025.

At 3:00 AM Beijing time on Thursday, the Federal Reserve will release the minutes from its last meeting in 2024, which is expected to further clarify officials' views on the economy, interest rates, and inflation trends in the coming years. The highlights of this minutes focus on the degree of disagreement, discussions on neutral interest rates, assessments of inflation and employment, and explorations of the impact of government policies.

First, regarding the degree of disagreement among officials, the rate cut decision on December 18 was not unanimous. Cleveland Fed President Beth Hammack voted against it, preferring to keep rates unchanged. However, she will no longer be a voting member of the FOMC in 2025, as four new regional Fed presidents will rotate in.

Secondly, attention should be paid to the assessments of inflation and the labor market. Federal Reserve officials predict that inflation will be more persistent in 2025 than previously expected, with the Fed's preferred price index, PCE, reaching 2.5% by the end of the year. Citigroup expects:

The meeting minutes will reflect a relatively hawkish viewpoint, including concerns about inflation potentially remaining elevated if policy rates are not kept sufficiently restrictive.

Regarding the labor market, Citigroup anticipates:

Most officials may still describe the labor market as "solid," although some may note that the market is "very slowly" softening. They also expect the unemployment rate to rise slightly this year, but at a slower pace than previously anticipated.

Additionally, there may be some hawkish discussions suggesting that the neutral interest rate has risen, and that policy rates may be closer to this level than previously thought. This will partly justify the committee's current plan to slow the pace of rate cuts.

The balance sheet reduction is also worth noting, as Citigroup expects:

Liquidity may still be described as very ample, but officials may discuss reducing the balance sheet reduction at the upcoming meeting to ensure it remains in this state. Officials lowered the reverse repo rate by 5 basis points at the December meeting, which should be described in the minutes as a recalibration to pre-pandemic norms.

Finally, regarding the impact of Trump’s policies, the meeting minutes may discuss potential new government policies that some Fed officials believe pose upside risks to growth and inflation. For example, Richmond Fed President Barkin recently stated that he believes the labor market will tighten and business activity will increase due to the elections. The minutes may specifically discuss tariffs as an upside risk to inflation, with at least "some" officials viewing it as a one-time price level effect that does not necessarily imply the need for tighter monetary policy.

At the December meeting, the Federal Reserve cut rates for the third consecutive time, lowering the target range for the federal funds rate by 25 basis points to 4.25%-4.5%, while also lowering rate cut expectations. In the quarterly economic forecast update, Fed officials expect the median target range for the federal funds rate to drop to 3.75%-4.0% by the end of 2025, which is 50 basis points lower than the current level.

Market expectations for rate cuts have also quickly declined. As of Tuesday, the interest rate futures market expects less than a 5% chance of a rate cut at the next meeting on January 28-29, with only one 25 basis point cut likely throughout 2025 Citigroup summarized in its latest report:

The minutes are likely to be relatively hawkish, with four Federal Reserve officials leaning towards not lowering interest rates at the meeting, and concerns about persistently high inflation should be evident in the meeting minutes. On the other hand, the minutes will also clearly indicate that most Federal Reserve officials expect the policy rate to continue to decline.

In our view, the cooling of inflation to 2% and the continued softening of the labor market will trigger rate cuts that are faster and deeper than the current market expectations.