Fed's November Meeting Signals Cautious Approach to Rate Cuts

In the latest developments from the Federal Reserve's Federal Open Market Committee (FOMC) meeting held in November, the central bank has decided to cut interest rates by a quarter-point. This adjustment brings the benchmark rate to a range of 4.50%-4.75%. The minutes from this important meeting, which were released on the evening of the 26th, highlight a consensus among Fed officials that inflation pressures are easing. This sentiment appears to reduce concerns regarding a severe slowdown in economic growth and the job market, thus paving the way for potential future rate cuts.

Gradual Rate Cuts Ahead

Despite the quarter-point cut, the Federal Reserve is adopting a cautious stance, emphasizing that any further rate reductions will be gradual and dependent on incoming economic data. This approach aims to mitigate risks associated with inflation and ensure economic stability. If upcoming inflation data fails to meet expectations, the pace of future rate cuts may slow down or be paused altogether.

Expectations for Economic Indicators

During policy discussions, some participants expressed optimism about aligning economic data with expectations, which includes a sustained decline in inflation towards the 2% target and maintaining maximum employment levels. Under these conditions, a gradual transition to a more neutral monetary policy could be warranted.

Impact on the Market

Analysts believe that a slower pace of interest rate reductions might lead to delays in the peak of the upcoming Bitcoin bull market, particularly following profit-taking linked to significant political events. The FOMC meeting minutes revealed unanimous agreement among all 19 officials on the decision to cut rates. While some officials noted that inflation risks remain relatively unchanged, the downside risks to economic activity and the labor market have lessened.

Balancing Monetary Policy Risks

The FOMC officials stressed the importance of striking a balance in monetary policy. A policy that is too loose may hinder future efforts to control inflation, while a too-tight policy could unnecessarily weaken the economy and job market. Importantly, some participants indicated that if inflation levels remain elevated, the FOMC may pause further rate cuts, keeping them at restrictive levels.

Understanding the Neutral Rate

Additionally, there is ongoing uncertainty regarding the neutral rate, which is the level of monetary policy that neither restricts nor encourages economic growth. Over the past year, estimates for this neutral rate have been on the rise. Chicago Fed President Austan Goolsbee mentions that his forecast for the neutral rate aligns closely with the Fed's median estimate of 2.9% derived from the September dot plot.

Looking Ahead: December FOMC Meeting

The Federal Reserve is set to convene for its next FOMC meeting on December 18, where further discussions on rate cuts are anticipated. Goolsbee has indicated a likelihood of continued rate reductions unless strong evidence of economic overheating emerges. Meanwhile, Neel Kashkari from the Minneapolis Fed, known for his hawkish perspective, also supports the idea of a December rate cut as a reasonable proposition.

Market Reactions and Future Predictions

Despite the enduring economic resilience and the recent robustness in U.S. inflation data, several Fed officials urge a measured approach to forthcoming rate cuts. Fed Chair Jerome Powell has signaled the absence of immediate pressure for rate reductions, thereby promoting a thoughtful decision-making process. Following the FOMC minutes, the market’s expectation for a December rate cut increased slightly from approximately 52% to 66.6%, with only a 33.4% likelihood of pausing rate cuts.

Institutional Forecasts for 2024

Looking forward, market forecasts suggest that the Federal Reserve is likely to decelerate its rate-cutting efforts next year. Predictions from Nomura Securities propose that the Fed may pause rate cuts during the December meeting, implementing only quarter-point reductions in both March and June of 2025. Similarly, Lin Qichao, Chief Economist at Cathay United Bank, projects a quarter-point cut in December, with additional reductions to follow in March and June 2024.