Fed rate cut divides policymakers at December meeting amid uncertainty

Federal Reserve Policymakers were deeply divided over the decision to cut interest rates at their December meeting, as the U.S. economy faces a difficult mix of risks, according to minutes of their latest policy meeting.

The Fed cut rates by 25 basis points for the third straight time at its December meeting, lowering the benchmark federal funds rate to a range of 3.5% to 3.75%. The decision was taken amid a slowdown in the job market high inflation above the Fed’s 2% target, a dynamic that endangers both sides of the central bank’s dual mandate.

Two voting members of the Federal Open Market Committee spoke in favor of keeping rates unchanged, while another spoke in favor of a deeper reduction of 50 basis points. Additionally, six officials released economic projections suggesting they were opposed to a reduction.

“Most participants” voted in favor of a reduction, while “some” of these policymakers argued that it was an appropriate forward-looking strategy that would “help stabilize the labor market” amid a recent slowdown in job creation. However, others “expressed concern that progress toward the committee’s 2% inflation target has stalled.”

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“Some participants suggested that, as part of their economic outlookit would likely be appropriate to keep the target rate unchanged for some time after a lowering of the range at this meeting,” the minutes state.

Policymakers including Fed Chairman Jerome Powell have suggested that the central bank’s policy level is now closer to neutral and that further rate cuts could be put on hold in the new year pending new economic data, after a historic 43 days. government shutdown which ended in November delayed key economic reports from the final months of the year.

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Some of the policymakers who were opposed or skeptical of the December rate cut decision “suggested that the arrival of a considerable amount of labor market and inflation data during the next period between meetings would be helpful in judging whether a rate cut was warranted.”

Inflation in December and labor market data is expected to be released Jan. 9 and 13, as federal agencies responsible for collecting data and compiling economic reports return to their normal release schedule following the shutdown.

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The minutes also showed that policymakers are watching for signs of a “K” shaped economy in which there is divergence in spending habits high and low income households.

“A majority of participants cited evidence of stronger growth in spending by higher-income households, while lower-income households had become increasingly price-sensitive and were adjusting their spending in response to the outsized cumulative increase in prices of basic goods and services in recent years,” the minutes said.

The Fed will hold its next monetary policy meeting on January 27-28 and the market believes it is more likely that it will keep rates stable.

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The chance that the Fed will leave rates in its current range of 3.5% to 3.75% is currently 85%, up from 67.1% a month ago, according to the CME FedWatch tool.

Reuters contributed to this report.