Federal Reserve officials were split on delivering more interest rate cuts at their meeting earlier this month, as the U.S. central bank enters a transitional phase with inflation on a course of moderation, though prices remain above the Fed’s ideal level.
Federal Reserve Chairman Jerome Powell speaks during a news conference earlier this month.
The minutes from the policy-setting Federal Open Market Committee meeting Nov. 6-7, when the panel agreed to lower interest rates by 25 basis points to 4.5% to 4.75%, signaled Fed staff support a more measured approach to further rate cuts.
It would likely be appropriate to move gradually toward a more neutral stance of policy over time,” according to the Tuesday afternoon release.
And some FOMC members said the central bank could entirely “pause its easing of the policy rate and hold it at a restrictive level if inflation remained elevated,” indicating rate cuts may be put on hold should inflation remain above the 2% target.
Yet others “remarked that policy easing could be accelerated if the labor market turned down or economic activity faltered,” indicating a split consensus as the central bank tries to tame inflation while keeping the economy afloat.
The investor reaction to minutes was muted, with the S&P 500 stock index holding its 0.4% daily gain and bond yields trading flat.
60%. That’s the market-implied odds of another 25 basis-point cut at the Fed’s Dec. 17-18 meeting, according to CME Group’s FedWatch Tool, which tracks derivative contract trading on Fed policy. That would bring the target range down to 4.25% to 4.5%, the lowest level since early 2023, but still significantly higher than the sub-3% rates from 2009 to 2021.
The Fed’s rate realignment came as inflation ravaged the U.S. economy, with annual consumer price index inflation peaking at a 41-year-high of 9.1% in June 2022. After slashing rates to close to 0 to stimulate the economy in early 2020, the Fed aggressively hiked rates to as high as 5.25% to 5.5% by last July, before initiating the ongoing cutting cycle this September as inflation moderated. Rate hikes are the primary vehicle the federal government uses to slow inflation as they discourage new business activity and cool the economy. The Fed-determined target federal funds rate only directly sets the lending costs associated with overnight transactions between financial institutions, but it heavily impacts the short-term interest rates across consumer and business loans.
The Fed’s cutting cycle hasn’t had the anticipated effect of lowering perhaps the most closely watched borrowing metric by consumers: mortgage rates. The average 30-year mortgage rate was 6.84% last week, some 75 basis points higher than the week of the September rate cut. That’s because yields for 10-year U.S. Treasury bonds, a proxy for the market’s medium-run monetary policy expectations and benchmark for mortgage rates, have shot up from 3.6% to 4.3% since the Fed lowered rates in September. The federal government’s record $36 trillion debt, and the prospect of lingering inflation, including concerns related to President-Elect Donald Trump’s tariff plans, have contributed to the rise in yields.
How Trump may impact the Fed. Trump said on the campaign trail he believes the president should have some influence on setting interest rates, going against the Fed’s historically independent nature, and has often criticized Fed Chairman Jerome Powell. Asked earlier this month if he’d step down if Trump called for him to do so, Powell flatly said no, saying it’s against the law.