Recent Federal Reserve meeting minutes indicate the central bank may start lowering interest rates as soon as late 2024 as inflation shows signs of stabilizing. However, economic uncertainty remains high and policymakers will continue taking a data-dependent approach to monetary policy decisions.
- Minutes from the December FOMC meeting suggest rate cuts could start in 2024 if data supports it.
- Inflation has fallen from 9.1% in June 2022 but remains above the Fed’s 2% target at around 6.5%.
- The Fed will rely on incoming economic data to guide future rate hikes and balance sheet reduction.
- Policymakers emphasize the outlook remains highly uncertain due to geopolitical risks and inflation persistence.
- The federal funds rate has increased to 5.25-5.5% to combat inflation, the fastest tightening since the 1980s.
Potential for Interest Rate Cuts in 2024
The Fed indicated in December FOMC meeting minutes released January 2 that it expects fed funds rate cuts could begin “as soon as late 2023 or 2024.” These reductions would be conditional on incoming economic data supporting a downward rate path.
Currently, the federal funds rate stands between 5.25 and 5.5%, and policymakers projected rates may decline to around 2% by the end of 2024.
Declining But Still High Inflation
While inflation has fallen from a peak of 9.1% in June 2022 to around 6.5% currently, it remains well above the Fed’s 2% target. In the meeting minutes, the FOMC notes it has “not yet seen clear progress” toward desired inflation levels.
The committee acknowledged improvements in inflation expectations and commodity prices but said “services inflation and wage inflation remained elevated.” This indicates the Fed will likely maintain a restrictive policy stance until it sees convincing evidence of sustainably lower inflation.
Data-Dependent Approach to Continue
The FOMC emphasized that economic outcomes remain “highly uncertain” and subject to “unusually elevated” risks due to geopolitical tensions and persistently high inflation.
As a result, policymakers reiterated they plan to rely heavily on incoming data to determine the appropriate pace of interest rate hikes and balance sheet reduction on a meeting-by-meeting basis. This data-dependent approach will allow the Fed to adjust course as needed based on real-time economic developments.
According to Richmond Fed President Thomas Barkin, “We have landed this incredibly complex economy in a softer place than many feared. But we have a ways to go, and we will get there one increment at a time. As chair Powell often says, we will be nimble.”