Original Author: Li Dan
Original Source: Wall Street Journal
Meeting minutes revealed that while overcoming significant internal divergence to continue rate cuts three weeks ago, most officials anticipated that if the disinflation trend aligns with their expectations, further rate cuts would be appropriate in the future. However, some policymakers believed that the rate-cutting actions should be paused 'for some time,' reflecting the Fed's cautious stance towards rate cuts in early next year.
On Tuesday, December 30th, Eastern Time, the Federal Reserve released the monetary policy meeting minutes from December 9th to 10th, which stated that during the discussion on the monetary policy outlook, participants expressed differing views on whether the policy stance of the Federal Open Market Committee (FOMC) was restrictive.
'Most participants believed that if inflation declines gradually as expected, it may be appropriate to further' cut rates.
Regarding the extent and timing of further rate cuts, 'some' participants indicated that, based on their economic outlook projections, after the rate cut at this meeting, 'it may be necessary to maintain the target range for the federal funds rate unchanged for some time.'
'A few participants noted that this approach would allow policymakers to assess the lagged effects of the Committee's recent move to a more neutral policy stance on the labor market and economic activity, while also giving policymakers time to gain more confidence that inflation is returning to 2%.
All participants agreed that monetary policy is not on a preset course but will be formulated based on the latest data, the evolving economic outlook, and the balance of risks.'
'Most' Participants Supported December Rate Cut, With a Few Possibly Having Supported Holding Steady
Three weeks ago, the Fed, as market expected, cut rates by 25 basis points for the third consecutive FOMC meeting, but it was the first time in six years that there were three dissenting votes against the rate decision. Among the dissenters, Trump-appointed Governor Milan continued to advocate for a 50 basis point cut, while two regional Fed presidents supported holding rates steady. Combined with the dot plot indicating that four non-voting officials also believed rates should remain unchanged, effectively seven people opposed the decision. With this number, the Fed saw its largest internal divergence in 37 years.
These meeting minutes also exposed the divergence within the Fed's decision-making layer regarding the December rate cut.
The minutes wrote that participants noted that the inflation rate has risen since the beginning of this year and remained at elevated levels, with existing indicators showing economic activity expanding at a moderate pace. They observed that job growth has slowed this year, and the unemployment rate has risen slightly as of September. Participants assessed that recent indicators are consistent with these conditions, and, 'downside risks to employment have increased in recent months.'
Given this background, 'most' participants supported a rate cut at the December meeting, while 'some' preferred to keep rates unchanged. 'Among the participants supporting a rate cut, a few suggested that the decision was a close call, or that they might have supported maintaining the target range for the federal funds rate unchanged.'
Participants supporting the cut 'generally viewed this decision as appropriate because downside risks to employment have increased in recent months, while upside risks to inflation have weakened since early 2025 or remained largely unchanged.'
The minutes showed that policymakers leaning towards no cut in December were concerned about the inflation process; they either believed that progress on disinflation had stalled this year, or felt that more confidence was needed that inflation would return to the Fed's 2% target. These participants also noted that if inflation does not return to 2% in a timely manner, long-term inflation expectations could rise.
The minutes then mentioned that 'Some' participants who supported, or might have supported, holding steady believed that during the intermeeting period before the next two FOMC meetings, a substantial amount of labor market and inflation data would be released, which would help judge whether rate cuts are needed. A few participants considered the December rate cut unjustified because the data received between the November and December meetings did not show any significant further weakening in the labor market.
Most Participants Believe Rate Cuts Help Prevent Labor Market Deterioration; Some Point Out Risks of Entrenched Inflation
Although exposing internal divisions, the divergence reflected in these minutes is not as severe as some outsiders suggested.
First, the minutes from the previous meeting in November showed that at that FOMC meeting, many participants believed it might be appropriate to keep rates unchanged within the year, while several thought it appropriate to continue cutting rates. Nick Timiraos, a veteran Fed reporter known as the 'new Fed whisperer,' pointed out that 'many' represents a larger number than 'several,' but most officials still believed that rates should be cut in the future, whether in December or not.
These minutes show that at the December meeting, most participants supported the rate cut that month, including some officials who had previously leaned towards pausing cuts this month.
Second, these minutes also show that regarding whether inflation or unemployment poses a greater threat to the U.S. economy, Fed policymakers were considerably divided at the December meeting. Most believed that rate cuts would help avoid deterioration in the labor market. The minutes wrote:
'In discussing risk management considerations that could affect the policy outlook, participants generally viewed upside risks to inflation as still elevated, while downside risks to employment were also elevated and had increased since mid-2025. Most participants noted that moving to a more neutral policy stance would help prevent a potential significant deterioration in the labor market. Many of these participants also believed that available evidence suggests the possibility that tariffs lead to persistent high inflation pressures has diminished.'
In contrast, Fed officials supporting no cut emphasized the risks of inflation. The minutes wrote:
'Several participants pointed to the risk that elevated inflation could become entrenched and believed that further reducing the policy rate amid high inflation data could be misinterpreted as suggesting that policymakers' commitment to the 2 percent inflation objective had weakened. Participants believed that risks needed to be carefully balanced and agreed that well-anchored longer-term inflation expectations are crucial for achieving the Committee's dual mandate.'
Reserve Balances Have Declined to Ample Levels
At the December meeting, the Fed, as Wall Street expected, initiated Reserve Management Purchases (RMP), deciding to buy short-term Treasury bills at year-end to address money market pressures. The meeting statement at the time wrote:
'The Committee judges that reserve balances have declined to ample levels and will begin purchasing short-term Treasury bills as necessary to maintain ample reserve supplies over time.'
These meeting minutes also reiterated that reserve balances met the condition for initiating RMP. The minutes wrote,
During the discussion of issues related to the balance sheet, participants agreed that 'reserve balances have declined to ample levels,' and the FOMC 'will purchase short-term Treasury bills as necessary to maintain ample reserve supplies over time.'
