Fed minutes show deep division at the December meeting

The U.S. Federal Reserve agreed to cut interest rates at its December meeting only after a deeply nuanced debate about the risks facing the U.S. economy right now, according to minutes of the latest two-day session.

Even some of those who supported the rate cut acknowledged “the decision was finely balanced or that they could have supported keeping the target range unchanged,” given the different risks facing the U.S. economy, according to the minutes released on Tuesday.

In economic projections released after the December 9-10 meeting, six officials outright opposed a cut and two of that group dissented as voting members of the Federal Open Market Committee.

“Most participants” ultimately supported a cut, with “some” arguing that it was an appropriate forward-looking strategy “that would help stabilize the labor market” after a recent slowdown in job creation.

Others, however, “expressed concern that progress towards the committee’s 2% inflation objective had stalled.”

“Some participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for some time after a lowering of the range at this meeting,” the minutes said of a debate that saw officials dissent both in favor of tighter and looser monetary policy, an unusual outcome for the central bank that has now happened at two consecutive meetings.

The quarter-point rate cut approved in December lowered the Fed’s benchmark overnight interest rate to a range of between 3.5% to 3.75%, the third consecutive move by the central bank as officials agreed that a slowdown in monthly job creation and rising unemployment warranted slightly less restrictive monetary policy.

But as rates fell, and approached a neutral level that neither discourages nor encourages investment and spending, opinion at the Fed became more divided about just how much more to cut. New projections issued after the December meeting show only one rate cut expected next year, while language in the new policy statement indicated the Fed would likely remain on hold for now until new data shows that either inflation is again falling or unemployment is rising more than anticipated.

The lack of official data during the 43-day government shutdown, a gap in information still not fully filled, continued to shape the outlook and policymakers’ views about how to manage risk.

Some of those either opposed or skeptical of the most recent cut “suggested that the arrival of a considerable amount of labor market and inflation data over the coming intermeeting period would be helpful on making judgments about whether a rate reduction was warranted.”

The data catch-up continues, with jobs and consumer price information for December coming on January 9 and January 13, back to the normal release schedule.

The Fed next meets on January 27-28, with investors currently expecting the central bank to leave its benchmark rate unchanged.

—Howard Schneider, Reuters

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