Federal Reserve minutes show officials backed gradual pace of rate cuts

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Federal Reserve officials support moving “gradually” to lower interest rates given stronger-than-expected US economic growth and fading concerns about the health of the labour market, according to a record of the November meeting.

Minutes from the meeting, released on Tuesday, suggest that US central bank officials no longer see an urgent need to rapidly reach a “neutral” rates level that does not hamper growth, following a bumper half-point cut in September.

At the November meeting, the Federal Open Market Committee lowered rates by a quarter-point to a range of 4.5-4.75 per cent — the second cut in as many meetings.

The Fed next meets in December, its final gathering before Donald Trump returns to the White House. The central bank is expected to follow through with another quarter-point reduction, although officials are monitoring the incoming data closely.

Chair Jay Powell said earlier this month that a solid US economy meant the central bank did not need to be in a “hurry” to lower rates. Inflation, while sharply lower than its 2022 peak, is still above the Fed’s 2 per cent target.

Central bank officials noted that inflation was easing, according to the minutes, but some warned that it could take longer than expected given the underlying strength of the economy and the possibility that geopolitical risks and supply chain disruptions could slow the decline.

The latest consumer price index report showed inflation ticking up to 2.6 per cent following a 0.2 per cent month-over-month increase.

Officials also took a more optimistic stance than in their previous meeting on the labour market outlook, saying there was “no sign” of rapid deterioration.

However, a pause in rate cuts would be warranted “if inflation remained elevated”, the minutes indicated, echoing a point Tom Barkin, president of the Richmond Fed and a voting member on this year’s FOMC, made to the Financial Times in an interview last week.

“If you’ve got inflation staying above our target, that makes the case to be careful about reducing rates,” he said. “If you’ve got unemployment accelerating, that makes the case to be more forward-leaning.”

Traders slightly favour another quarter-point cut in December, according to future markets.

Neel Kashkari, president of the Minneapolis Fed, said this week that a December cut was “reasonable”, while Chicago Fed president Austan Goolsbee backed the idea of additional rate reductions.

The government debt market trimmed its losses for the session as investors digested the document. The yield on the policy-sensitive two-year Treasury, which moves in the opposite direction to its price, was up 0.01 percentage points at 4.28 per cent in afternoon trading, having been at 4.29 per cent shortly before the release of the minutes.

The S&P 500 pulled back from a session high, but remained 0.3 per cent higher. The Nasdaq Composite was up 0.3 per cent.

Additional reporting by Peter Wells in New York