The Federal Reserve's meeting minutes reveal serious divisions: many believe that a rate cut in December is inappropriate, while some are concerned about a disorderly decline in the stock market

The meeting minutes show that at the most recent monetary policy meeting at the end of last month, Federal Reserve policymakers had significant disagreements about whether to cut interest rates in December, with those in favor of a rate cut not holding an absolute majority. There was almost unanimous agreement on stopping the quantitative tightening (QT) actions related to reducing the balance sheet. Regarding the risks to financial stability, some expressed concerns about a disorderly decline in the stock market.

The Federal Reserve meeting minutes released on Wednesday, November 19, Eastern Time, stated:

"In discussing the recent direction of monetary policy, participants expressed sharply different views on the policy decision most likely to be taken at the FOMC's December meeting. Most participants believed that as the committee gradually shifts to a more neutral policy stance, it may be appropriate to” further cut interest rates,

“However, some participants suggested that they may not necessarily believe that a 25 basis point cut is appropriate at the December meeting. Several participants assessed that if economic developments between the next two meetings align with their expectations, it may be more appropriate to” further cut rates in December. Many participants indicated that based on their economic outlook, it may be appropriate to” maintain rates unchanged for the remainder of the year.

All participants agreed that monetary policy is not static but will be influenced by various latest data, changing economic outlooks, and risk balances.

The media pointed out that in the so-called counting terminology commonly used in the Federal Reserve meeting minutes, the term “many” represents a number lower than “most/majority.” Therefore, the above statements indicate that those opposing another rate cut in December were still in the minority at the last FOMC meeting.

In any case, the belief that many think a rate cut should not occur in December reflects a hawkish tendency within the Fed.

The resolution statement released after the Federal Reserve's meeting on October 29 showed that the FOMC decided to cut rates by 25 basis points for the second consecutive time, but among the 12 voters, two opposed this rate cut decision. Unlike before, there were disagreements this time regarding the magnitude of the cut and whether to continue taking action. Among the opponents, the newly appointed governor, who was “handpicked” by President Trump, Milan, still hoped for a 50 basis point cut, while Kansas City Fed President George supported holding steady.

Many believe this year's tariff increases have limited overall inflation impact; most believe rate cuts may exacerbate inflation risks

The hawkish views within the Federal Reserve are reflected in the minutes statement, which mentioned that in discussing risk management considerations,

“Most participants believed that the FOMC's shift to a more neutral policy stance would help avoid a significant deterioration in labor market conditions. Among them, many participants also believed that given the increasing evidence that this year's tariff increases may have limited impact on overall inflation, the committee should appropriately ease its policy stance to address the downside risks to employment Most participants pointed out that against the backdrop of persistently high inflation data and a slowly cooling labor market, further interest rate cuts could exacerbate the risk of sustained high inflation or may be misinterpreted as a lack of commitment by decision-makers to the 2% inflation target.

Some worry about a sudden reassessment of AI prospects leading to a sharp drop in stock prices

The minutes show that during discussions about financial stability risks, some Federal Reserve officials expressed concerns about "overvaluation of assets in financial markets." The minutes stated:

"Some participants commented on the issue of overvaluation of financial market assets, with several participants emphasizing the risk of disorderly declines in stock prices, especially in the event that the market suddenly reassesses the prospects of artificial intelligence (AI) related technologies."

A couple of participants also mentioned risks associated with high corporate debt. These concerns reflect that the Federal Reserve, in formulating monetary policy, is not only focused on inflation and employment but is also closely monitoring financial stability conditions.

Nearly unanimous support for ending balance sheet reduction; many support increasing short-term debt holdings

The statement from the last meeting indicated that the FOMC decided to end the balance sheet reduction plan on December 1. This means that the balance sheet reduction actions that began on June 1, 2022, will conclude after three and a half years. The Federal Reserve's announcement indicated that after stopping the balance sheet reduction in December, the principal repayments from its agency mortgage-backed securities (MBS) will be reinvested in short-term U.S. Treasury securities, replacing maturing MBS holdings with short-term Treasuries.

The minutes released this Wednesday showed that "almost all" participants believed that stopping the balance sheet reduction on December 1 was appropriate, or in other words, they all supported this decision.

Some market participants had previously worried that the Federal Reserve might wait too long to stop the balance sheet reduction, which could lead to fluctuations in overnight financing rates due to liquidity pressures.

The minutes stated that participants unanimously agreed that the recent tightening of conditions in the money market indicated that the balance sheet reduction was nearing its end.

"Many participants pointed out that a higher proportion of short-term Treasury holdings could provide the Federal Reserve with more flexibility to respond to changes in reserve demand or non-reserve liabilities, thereby helping to maintain adequate reserve levels."

"New Federal Reserve News Agency": A narrow majority of decision-makers feel uneasy about a rate cut in December

Nick Timiraos, a senior Federal Reserve reporter known as the "New Federal Reserve News Agency," wrote that the rate cut decision in October sparked strong opposition to a potential rate cut in December.

Timiraos emphasized in his article that the minutes showed strong divergent views among the FOMC regarding what policy decision should be made at the next meeting in December, leading to an increasing number of Federal Reserve decision-makers—possibly a narrow majority—feeling uneasy about a rate cut in December. He noted that this was the largest divergence in decision-making among the FOMC regarding the next meeting in years.

Timiraos pointed out that the minutes indicated that several Federal Reserve officials opposed the rate cut decision in October, possibly including some regional Federal Reserve presidents who did not have voting rights at the FOMC meetings this year Other officials who support interest rate cuts also indicated that they could accept inaction, highlighting the severity of the divisions within the committee.

Timiraos also noted that for decisions after the December meeting, most Federal Reserve officials believe it is necessary to further lower interest rates