Federal Reserve officials have indicated that due to slow progress on inflation and a still strong USA economy, caution is needed regarding further interest rate cuts. However, the minutes from the Federal Reserve's December meeting may reveal how widely this viewpoint is accepted among policymakers, especially in light of the incoming Trump administration and the new uncertain economic environment.

After lowering interest rates by 25 basis points at the meeting on December 17-18, Federal Reserve Chairman Powell stated that policymakers might now hold a 'cautious' stance on further rate cuts, noting that some officials have begun to view upcoming decisions as 'driving in foggy weather or walking into a dark room full of Furniture,' given the uncertainty surrounding the proposals of the elected President Trump on tariffs, taxes, and more.

The meeting minutes, to be released at 3 AM Beijing time on Thursday, may help clarify how policymakers will handle further interest rate cuts. Forecasts released after the December meeting indicated that officials expected only a 50 basis point reduction in interest rates this year, compared to the 1 percentage point forecast made in September last year.

Citigroup Analysts wrote that the meeting minutes 'may adequately reflect this relatively hawkish viewpoint, which will include concerns over the potential for prolonged high inflation if policy rates do not remain strict enough and perhaps even discuss the rates required to fully bring inflation back down to the Federal Reserve's 2% target.'

The Citigroup team wrote, 'This will be part of the reasoning behind the committee's plan to slow the pace of interest rate cuts.'

The Federal Reserve has lowered the policy interest rate by a full 1 percentage point during its last three meetings in 2024, with the benchmark rate currently set in the Range of 4.25% to 4.5%.

Economic data thereafter have remained stable in several key areas, with USA economic growth still far exceeding 2%, an unemployment rate remaining low at 4%, and the Federal Reserve's preferred inflation measure—the Personal Consumption Expenditures (PCE) price index—recently showing a year-on-year growth rate of 2.4%.

Since the last meeting, Federal Reserve officials who have publicly spoken indicated that there is no reason to rush further interest rate cuts before the data changes. For example, a significant drop in hiring and an increase in the unemployment rate, or a decrease in the inflation rate back to the 2% target.

Richmond Federal Reserve President Barkin stated last week that he believes the Federal Reserve should keep credit conditions tight until there is "real certainty that inflation is steadily down to the 2% target... The second point is there is a significant weakness in economic demand."

The non-farm payroll data set to be released on Friday will show the changes in employment and wages in the USA for December of last year. The independent labor market survey for November published on Tuesday illustrated an overall stable situation, or at least a slow change. Job vacancies slightly increased, which is seen as a sign of a continuing strong economy, but the number of hires and voluntary separations slightly decreased, viewed as signs of a weak hiring environment.

The meeting minutes may also show that Federal Reserve officials discussed in more detail when to stop the current efforts to reduce the size of the balance sheet. Since the summer of 2022, the Federal Reserve has cut approximately 2 trillion dollars in Bond holdings, and it is expected that officials will end the balance sheet reduction sometime in 2025.

Some Federal Reserve watchers expect the meeting minutes to provide new information regarding the so-called end of 'Algo tightening'.

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Editor/lambor