Original author: Li Dan

Original source: Wall Street Journal

The meeting minutes show that while overcoming significant internal disagreements, the majority of officials decided three weeks ago to continue lowering interest rates, and they expect that if the downward trend in inflation aligns with their expectations, further rate cuts may be appropriate in the future. However, some decision-makers believe that rate cuts should be paused "for some time," reflecting the Federal Reserve's cautious stance on lowering rates early next year.

On Tuesday, the 30th, Eastern Time, the Federal Reserve released the minutes from the monetary policy meeting held on December 9-10, which stated that during discussions on the monetary policy outlook, participants expressed differing views on whether the Federal Open Market Committee (FOMC) policy stance was restrictive.

"Most participants believe that if inflation gradually declines as expected, further rate cuts may be appropriate."

Regarding the magnitude and timing of further rate cuts, "some" participants indicated that based on their economic outlook, it may be necessary to maintain the target range for the federal funds rate unchanged "for some time" after the rate cut at this meeting.

"A few" participants pointed out that this approach would allow decision-makers to assess the lagging effects of the more neutral policy stance recently adopted by the FOMC on the labor market and economic activity, while also giving decision-makers time to be more confident about inflation returning to 2%.

All participants unanimously agreed that monetary policy is not predetermined but will be formulated based on various latest data, the evolving economic outlook, and the balance of risks.

"Most" participants supported the December rate cut, while a minority might have supported holding steady

Three weeks ago, as the market expected, the Federal Reserve cut rates by 25 basis points for the third consecutive FOMC meeting, but for the first time in six years, 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 steady, and the dot plot indicated that four non-voting officials also believed rates should remain unchanged, effectively resulting in seven opposing the decision. This number reflects the largest internal disagreement within the Fed in 37 years.

The minutes from this meeting also revealed divisions among the Federal Reserve's decision-makers regarding the December rate cut.

The minutes stated that participants noted that inflation rates have risen since the beginning of this year and remain at elevated levels, with existing indicators showing that economic activity is expanding at a moderate pace. They observed that job growth has slowed this year, and the unemployment rate has slightly increased as of September. Participants assessed that recent indicators are consistent with these conditions, while "the downside risks to employment have increased in recent months."

In light of this background, "most" participants supported a rate cut at the December meeting, while "some" leaned towards maintaining rates unchanged. "Among those supporting the rate cut, a few hinted that this decision was made after careful consideration, or that they might have supported keeping the target range for the federal funds rate unchanged."

Participants supporting the rate cut generally believed that this decision was appropriate because the downside risks to employment have increased in recent months, while the upside risks to inflation have weakened or remained largely unchanged since early 2025.

The minutes indicated that decision-makers inclined to not cut rates expressed concerns about the inflation process, either believing that progress in reducing inflation this year has stalled or that more confidence is needed regarding inflation returning to the Fed's target of 2%. These participants also pointed out that if inflation does not return to 2% in a timely manner, long-term inflation expectations may rise.

The minutes further mentioned that "some" participants who support or may support holding steady believe that a significant amount of labor market and inflation data will be released during the interval between the next two FOMC meetings, which will help determine whether a rate cut is necessary. A few participants argued that a December rate cut is unreasonable because the data received during the interval between the November and December meetings did not indicate any clear further weakness in the labor market.

Most participants believe that rate cuts help prevent labor market deterioration, while some pointed out the risks of entrenched inflation

Although internal disagreements were exposed, the divisions reflected in this meeting's minutes were not as severe as some external observers suggested.

First, the minutes from the previous meeting in November showed that many participants believed it might be appropriate to maintain rates unchanged this year, while several others thought it was suitable to continue cutting rates. Senior Fed reporter Nick Timiraos, known as the "New Fed Communications Agency," pointed out that "many" represents a larger number than "several," but most officials still believe that rate cuts should occur in the future, regardless of whether it is in December.

Moreover, this meeting's minutes showed that at the December meeting, the majority of participants supported a rate cut that month, including some officials who had previously leaned towards pausing rate cuts.

Secondly, the minutes also revealed considerable disagreement among Federal Reserve decision-makers regarding which poses a greater threat to the U.S. economy: inflation or unemployment. The majority believed that rate cuts would help avoid deterioration in the labor market. The minutes stated:

"When discussing risk management factors that may affect the monetary policy outlook, participants generally agreed that the risks of rising inflation remain high, while the risks of declining employment are also high and have increased since mid-2025. Most participants pointed out that shifting to a more neutral policy stance would help prevent a potentially severe deterioration in the labor market. Many of these participants also believe that existing evidence suggests that the likelihood of tariffs causing sustained high inflationary pressures has decreased."

In contrast, officials supporting the decision to not cut rates emphasized the risks of inflation. The minutes stated:

"Some participants pointed out the risk of inflation becoming entrenched and believed that further lowering the policy rate in the context of persistently high inflation data could be misinterpreted as a sign that decision-makers' commitment to the 2% inflation target has weakened. Participants felt that careful weighing of risks is necessary and unanimously agreed that solid long-term inflation expectations are crucial for achieving the committee's dual mandate."

Reserve balances have fallen to adequate levels

At the December meeting, the Federal Reserve initiated Reserve Management Policy (RMP) as Wall Street expected, deciding to purchase short-term government bonds at year-end to address pressures in the money market. The meeting statement at that time read:

"The FOMC believes that reserve balances have fallen to adequate levels and will begin purchasing short-term government bonds as needed to maintain a sufficient supply of reserves."

The minutes from this meeting also reiterated the condition of reserve balances reaching the threshold to initiate RMP. The minutes stated that during discussions on balance sheet-related issues, participants unanimously agreed that "reserve balances have fallen to adequate levels," and the FOMC "will purchase short-term government bonds as needed to maintain a sufficient supply of reserves."

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