The policy threshold has been raised! The minutes of the Federal Reserve meeting show “conditional support” for further interest rate cuts in the future

The newly released minutes of the meeting show that the internal position of Federal Reserve officials on whether to cut interest rates in December is far more complicated than the divided voting results themselves. Although the Federal Open Market Committee (FOMC) finally decided to cut interest rates for the third and last time during the year, minutes revealed, many officials supporting interest rate cuts “almost supported suspending interest rate cuts” at the time.

The Zhitong Finance App learned that the minutes showed that a total of three officials voted against the December meeting, the highest number since 2019. Two of them advocated keeping interest rates unchanged, while the other believed that interest rates should be cut more drastically. But the discussion didn't stop there. The conference documents point out that even among the officials supporting interest rate cuts, there were “a few” who believed that the judgment at the time was very close to standing still, reflecting clear differences within the Commission over economic prospects and policy paths.

In terms of forward-looking guidance, the minutes show that the Federal Reserve “conditionally supports” further easing in the future. Most participants believed that if inflation gradually falls as expected, future interest rate cuts “may be appropriate.” But this consensus is not strong.

The “bitmap” released in December further revealed differences: the 19 policymakers' median interest rate forecast for 2026 only pointed to a 25 basis point rate cut, but their views were extremely scattered. 7 expected not to cut interest rates next year, and 4 expected to cut interest rates twice. A number of other officials believe that after cutting interest rates in December, it may be more appropriate to “keep the target range unchanged for a period of time”, highlighting a cautious attitude about the pace and extent of interest rate cuts.

The market's reaction to this was lackluster. According to the CME FedWatch Tool, investors currently expect that the probability that the Federal Reserve will suspend interest rate cuts at the January meeting is about 85%, and their expectations on whether to continue to suspend interest rates in March are also close to half. There has been almost no change in this judgment since the minutes were released.

In addition to interest rate discussions, another major focus of the December meeting minutes was on liquidity management in the financial system. The minutes revealed that Federal Reserve officials have decided to start purchasing treasury notes to deal with rising pressure on the money market.

According to a survey quoted in the minutes of the meeting, respondents expected the average net purchase size of the Federal Reserve over the next 12 months to be about 220 billion US dollars. The Federal Reserve initially plans to buy about 40 billion US dollars of treasury notes every month, then gradually slows down. Currently, it has completed purchases of about 38 billion US dollars in the same month, and plans to continue operations in January.

Officials stressed that the move was aimed at managing bank reserve levels and had nothing to do with monetary policy positions or stimulating the economy. The conference discussions pointed out that under the combined effects of quantitative austerity (QT) and the increase in the scale of treasury note issuance, short-term capital costs are rising faster than in previous cycles, and the repurchase market showed signs of tension at one point. The Federal Reserve ended its downsizing earlier this month to prevent insufficient liquidity from impacting the financial market's “pipeline system.”

The minutes show that some officials suggested that instead of mechanically anchoring a certain amount of reserves, more attention should be paid to the performance of money market interest rates compared to reserve interest rates. According to the data, the key overnight financing rate was fixed at 3.77% on December 29, 12 basis points higher than the reserve interest rate.

Some officials also warned that if the definition of “sufficient reserves” results in excess reserves in the system, it may stimulate leveraged investors to take excessive risks; in terms of tool selection, some participants want to rely more on treasury bills to buy, while others believe that standing buyback tools should play a more active role in controlling interest rates, but the market still has “stigmatizing” concerns about using this tool.

Overall, the minutes show that the Federal Reserve remains highly cautious about the outlook against the backdrop of gradual easing of inflation and still resilient economic growth. Officials specifically added the expression “magnitude and timing” to the post-meeting statement, clearly emphasizing that future policy adjustments will depend on data, changes in outlook, and risk balance. This phrase did not appear after the October meeting, indicating that the threshold for further easing has been raised.

The minutes also mentioned that officials considered inflation, conflicting signals from the labor market, and uncertainty surrounding Trump's tariff policy during discussions.

With only one trading day left in the year, the overall volatility of US stocks is limited. The market's next focus may shift to the four regional Federal Reserve presidents who rotated to enter the FOMC voting seat in January, and the candidate for the next Federal Reserve chairman that Trump is expected to announce at the beginning of next month.