Fed meeting minutes: "Most" officials expect it to be appropriate to continue cutting interest rates after December, with some advocating staying on hold "for some time"

# Li Dan

Most participants believed that if inflation declines gradually as expected, it may be appropriate to further cut interest rates. Most participants supported the interest rate cut in December, among whom a few indicated that the decision was made after careful consideration and that they might have favored keeping rates unchanged instead. Those in support of the rate cut generally noted that the downside risks to employment had increased in recent months. Most participants opined that cutting interest rates would help prevent a deterioration in the labor market, while some pointed out the risk of entrenched elevated inflation. All participants agreed that reserve balances had fallen to an ample level, and that the Federal Reserve would purchase short-term Treasury securities as needed for reserve management (RMP).

The meeting minutes showed that while overcoming significant internal divisions to decide on a further rate cut three weeks ago, most officials anticipated that if the downward trend of inflation aligns with their expectations, it would be appropriate to cut rates further in the future. However, some policymakers argued that the rate-cutting cycle should be paused "for some time", reflecting the Federal Reserve's cautious stance towards another rate cut early next year.

On Tuesday, December 30 (Eastern Time), the Federal Reserve released the minutes of its monetary policy meeting held on December 9-10. The minutes stated that when discussing the outlook for monetary policy, participants expressed differing views on whether the policy stance of the Federal Open Market Committee (FOMC) was restrictive.

"Most participants judged that it would likely be appropriate to further reduce the target range for the federal funds rate if inflation continued to move down gradually as expected."

Regarding the magnitude and timing of future rate cuts, "some participants" noted that, based on their forecasts for the economic outlook, after the rate cut at this meeting, "it might be appropriate to maintain the target range for the federal funds rate for some time."

"A few participants pointed out that such an approach would allow policymakers to assess the lagged effects of the Committee's recent shift to a more neutral policy stance on the labor market and economic activity, while also giving them time to gain greater confidence that inflation is moving sustainably toward 2%."

"All participants agreed that monetary policy was not on a preset course and would be determined based on incoming data, evolving economic outlooks, and the balance of risks."

### Most Participants Supported December Rate Cut; A Few Might Have Favored Standing Pat

As expected by the market, the Federal Reserve cut interest rates by 25 basis points three weeks ago, marking the third consecutive rate cut at an FOMC meeting. However, it was the first time in six years that three votes were cast against the rate decision. Among the dissenters, Trump-nominated Governor Milan continued to advocate for a 50-basis-point cut, while two regional Fed presidents supported keeping rates unchanged. In addition, the dot plot indicated that four non-voting officials also believed rates should remain steady, meaning seven officials actually opposed the decision. In terms of the number of dissenters, this represented the largest internal division within the Fed in 37 years.

The meeting minutes also exposed the divisions among Fed policymakers regarding the December rate cut.

The minutes stated that participants noted that inflation had risen since the start of the year and remained at an elevated level, with available indicators showing that economic activity was expanding at a moderate pace. They observed that employment growth had slowed this year, and the unemployment rate had edged up through September. Participants assessed that recent indicators were consistent with these trends, and that "the downside risks to employment had increased in recent months."

Against this backdrop, "most participants" supported a rate cut in December, while "some" preferred to keep rates unchanged. "Among those who supported a rate cut, a few suggested that the decision was a close call or that they might have favored maintaining the target range for the federal funds rate."

Participants in favor of the rate cut "generally judged that the decision was appropriate because the downside risks to employment had increased in recent months, while the upside risks to inflation had diminished or remained largely unchanged since the beginning of 2025."

The minutes showed that policymakers who preferred not to cut rates in December expressed concerns about the inflation trajectory. They either believed that progress on reducing inflation had stalled this year or that greater confidence was needed that inflation would return to the Fed's 2% target. These participants also noted that if inflation fails to move back to 2% in a timely manner, longer-term inflation expectations could rise.

The minutes added that "some participants" who supported or might have supported standing pat argued that a significant amount of labor market and inflation data would be released between the next two FOMC meetings, which would help determine whether further rate cuts are necessary. A few participants believed that the December rate cut was unjustified, as the data received between the November and December meetings did not indicate any significant further softening in the labor market.

### Most Participants Believed Rate Cut Helps Prevent Labor Market Deterioration; Some Highlighted Risk of Entrenched Inflation

While revealing internal divisions, the disagreements reflected in the meeting minutes were not as severe as suggested by some external observers.

First, the minutes of the previous November meeting showed that at that FOMC gathering, many participants believed it might be appropriate to keep rates unchanged for the rest of the year, while several argued that further rate cuts would be suitable. Nick Timiraos, a senior Fed reporter known as the "New Fed Wire", pointed out that "many" represents a larger number than "several", though most officials still believed that rate cuts would be appropriate in the future, regardless of whether it happened in December.

In contrast, the current minutes indicated that at the December meeting, most participants supported a rate cut that month, including some officials who had previously leaned toward pausing rate cuts in December.

Second, the minutes also revealed that Fed policymakers had considerable disagreements at the December meeting regarding whether inflation or unemployment posed a greater threat to the U.S. economy. Most of them believed that cutting interest rates would help avoid a deterioration in the labor market. The minutes stated:

"When discussing the risk-management considerations that could influence the outlook for monetary policy, participants generally agreed that upside risks to inflation remained elevated, while downside risks to employment were also significant and had increased since mid-2025. Most participants noted that shifting to a more neutral policy stance would help prevent a potential severe deterioration in the labor market. Many of these participants also believed that available evidence suggested that the likelihood of tariffs sustaining upward pressure on inflation had diminished."

In contrast, Fed officials who supported keeping rates unchanged emphasized the risks of inflation. The minutes noted:

"Several participants pointed out the risk that elevated inflation could become entrenched and expressed concern that further reducing the policy rate amid persistently high inflation data might be misinterpreted as suggesting a weakening of the Committee's commitment to its 2% inflation goal. Participants agreed that risks needed to be carefully balanced and that well-anchored longer-term inflation expectations were essential for achieving the Committee's dual mandate."

### Reserve Balances Have Fallen to Ample Level

At the December meeting, as expected by Wall Street, the Federal Reserve launched Reserve Management Purchases (RMP), deciding to purchase short-term Treasury securities at the end of the year to address pressures in the money market. The meeting statement at that time stated:

"The Committee judges that reserve balances have fallen to an ample level and will begin purchasing short-term Treasury securities as needed to maintain an ample supply of reserves over time."

The current meeting minutes also reaffirmed that reserve balances had reached the threshold for initiating RMP. The minutes stated that:

When discussing issues related to the balance sheet, participants unanimously agreed that "reserve balances had fallen to an ample level", and that the FOMC "will begin purchasing short-term Treasury securities as needed to maintain an ample supply of reserves over time."

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