At the last meeting of the year, last December 10, The Federal Reserve decided to lower interest rates by 25 basis pointsleaving the price of money in the range of 3.5% / 3.75%, a decision that the markets expected. Also, as expected, the division within the Fed became evident, at a time when the organization is split in two, with a group of members of the Federal Open Market Committee betting on rate cuts, in some cases, aggressive, and others preferring to keep the price of money unchanged.
The division responds to the concern that Fed members now have about the economic situation in the United States. On the one hand, there are those members who believe it is necessary to lower rates to support American employment, which is showing signs of deterioration, and on the other there are those who fear giving a boost to inflation again, something that would generate a loss of credibility in the institution, if this part of its mandate (maintaining the CPI at a growth of around 2%), is again neglected.
Now, The publication of the minutes of the meeting shows how the majority of Fed members are inclined to continue lowering interest rates in the futurealthough the division within the entity remains. “Most participants indicated that a downward movement, to continue moving closer to a neutral monetary policy, will help avoid the possibility of further deterioration in the labor market,” the minutes of the meeting show.
However, the minutes also note that “several members highlighted the risk of high inflation becoming anchored, and suggested that lowering rates further in a context of high inflation readings may be misinterpreted, implying that there is less commitment by Fed members to the 2% inflation target.”
The minutes record how Governor Stephen Miran, Donald Trump’s strong man at the Fed, voted for an even bigger rate cut than agreed, by proposing to lower rates by 50 basis points, instead of 25. In contrast, Austan Goolsbee, president of the Chicago Fed, and Jeff Schmid, of the Kansas City Fed, chose to vote not to touch rates at this meeting. The rest of the members agreed to lower the price of money by 25 basis points, as was finally agreed.
Although the Fed decided at the meeting to lower interest rates, and drew an idyllic scenario for the US economy next year, improving the outlook for GDP growth, but cutting inflation, the minutes show that members are somewhat concerned about not having had enough macroeconomic data in the previous weekswhich would allow them to update the macro picture accurately, due to the government shutdown that canceled the publication of various macroeconomic data in the previous weeks.
“Several members warned that there may be changes in the outlook for economic activity, associated with the government shutdown, something that may make it more difficult in the coming months to determine the underlying trend of growth,” the minutes state.
Concern about lack of liquidity for banks
Another of the keys to the meeting was the decision made by the Fed to immediately begin to buy short-term Treasury bondsto expand the central bank’s asset balance, and thus increase liquidity in the US banking system, which is showing signs of tension in recent months.
The minutes show the concern of several members of the organization over the fact that the indicator that has raised the alarm (the differential between the overnight interest rate versus the interest that the Fed pays to the banks for leaving the money deposited in the central bank window) is now being more acute than in the processes in which the Fed reduced the balance in the past.
“Several participants highlighted that the recent increase in this differential has been faster than during the decline in the balance of the 2017-2019 period,” the document states. and also refers to the decision to now purchase short-term bonds, and not Treasury securities with longer maturities. “Participants expressed their preference that purchases be made in Treasury bills, and that the composition of the asset balance [de la Fed] change, although no decision has been made on what the composition of the balance sheet will be like in the long term,” the document explains.
For its part, Wall Street continues to trade in the red after knowing the content of the minutes. Thus, the US markets recorded declines, with the Dow Jones falling 0.11%, while the Nasdaq 100 fell 0.07%. For its part, the S&P 500 fell 0.03%.