Federal Reserve — FOMC Statement (USA, 2024)

FOMC Minutes of the Federal Open Market Committee December 17 18, 2024 F E D E R A L R E S E R V E S Y S T E M Minutes of the Federal Open Market Committee December 17 18, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, December 17, 2024, at 10:30 a.m. and continued on Wednesday, December 18, 2024, at 9:00 a.m.1 Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Nominal Treasury yields fluctuated over the intermeeting period and were slightly higher, on net, than in early November. Treasury yields had risen notably since their trough in mid-September, with the rise in the 10-year nominal yield driven largely by increases in real yields. Liquidity in Treasury markets deteriorated somewhat following the U.S. election but remained well within the ranges observed over the past three years. With near-term measures of inflation compensation a little higher over the intermeeting period and longer-term measures little changed, the manager noted that there were few signs of concern about persistent inflationary pressures in market prices. Equity prices largely sustained the gains that they had experienced in anticipation of, and immediately following, the U.S. election. The manager noted that market expectations for the path of the federal funds rate were little changed over the intermeeting period. Markets had almost fully priced in a 25 basis point cut in the target range for the federal funds rate at this meeting, and all respondents from the Open Market Desk s Survey of Primary Dealers and Survey of Market Participants expected the same. Survey respondents anticipated that the pace of rate cuts would slow considerably in 2025, with the median respondent expecting 75 basis points of cuts for the full year; options and futures prices suggested a somewhat lower level of expected policy easing in 2025. However, in discussing both survey and market expectations, the manager noted that there was considerable uncertainty among market participants about the path of the federal funds rate in the year ahead. The manager also discussed balance sheet policy expectations. The average estimate of survey respondents for the timing of the end of balance sheet runoff shifted a bit later, to June 2025. This shift mainly reflected revisions to estimates by respondents who had expected balance sheet runoff to end in the last quarter of 2024 or in early 2025. 1 The Federal Open Market Committee is referenced as the  FOMC  and the  Committee  in these minutes; the Board of Governors of the Federal Reserve System is referenced as the  Board  in these minutes. 2 December 17 18, 2024 Regarding international developments, the manager noted that market participants expected central banks in nearly all advanced foreign economies (AFEs) to continue to reduce their policy rates in 2025. In contrast to the U.S., market expectations for policy rates at the end of 2025 in most AFEs had shifted lower over the intermeeting period. The manager noted that this widening between U.S. and foreign interest rates appeared to be a major contributor to the increase in the trade-weighted U.S. dollar index observed over the intermeeting period. The manager then turned to money markets and Desk operations. Unsecured overnight rates had remained stable over the intermeeting period, and with the exception of temporary pressures around month-end and Treasury auction settlement dates, rates on overnight repurchase agreements (repo) were little changed. The manager noted that, on average, market participants appeared to be expecting upward pressure in repo markets around year-end comparable with that seen at the September quarter-end. Based on term and forward-settling repo volumes, market participants appeared to have been more proactive than in recent years in preparing for the year-end, which the manager judged could help mitigate somewhat the extent of upward pressure on repo rates during that time. Pricing in the federal funds market continued to be insensitive to day-to-day changes in the supply of reserves over the intermeeting period. The manager noted that this outcome was consistent with reserves remaining abundant and that various other indicators, as well as responses about banks  desired reserve levels from the Federal Reserve s Senior Financial Officer Survey, pointed to the same conclusion. Looking ahead, the manager raised the possibility that the potential reinstatement of the debt limit in 2025 could result in substantial shifts in Federal Reserve liabilities that could pose challenges in assessing reserve conditions. Usage of the overnight reverse repurchase agreement (ON RRP) facility continued its decline over the intermeeting period. The recent decrease in ON RRP usage was attributable in part to increases in net Treasury bill issuance, which made Treasury bill rates more attractive. In the near term, the manager judged that ON RRP volumes were likely to rise because of an expected decline in net Treasury bill issuance and typical year-end dynamics. The manager also noted that the potential reinstatement of the debt limit could keep ON RRP balances elevated for some time in 2025. The manager discussed market expectations regarding a technical adjustment that would lower the ON RRP offering rate to the bottom of the target range for the federal funds rate. Based on the Desk surveys and market outreach, most market participants expected such an adjustment at this meeting. Market participants  views varied on how much downward pressure this adjustment would put on money market rates, but repo rates were generally expected to fall more than the federal funds rate. Minutes of the Federal Open Market Committee 3 The manager concluded by noting that the Desk was planning to add a second standing repo facility (SRF) auction on each day of the week spanning year-end. The manager viewed these additional auctions as technical exercises that could improve the Federal Reserve s understanding of how SRF auction times can support effective policy implementation and market functioning during periods of expected money market pressures. By unanimous vote, the Committee ratified the Desk s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System s account during the intermeeting period. Staff Review of the Economic Situation The information available at the time of the meeting indicated that real gross domestic product (GDP) had continued to expand at a solid pace in 2024. Labor market conditions had eased since early 2024, but the unemployment rate remained low. Consumer price inflation was below its year-earlier rate but was still somewhat elevated. Total consumer price inflation as measured by the 12-month change in the price index for personal consumption expenditures (PCE) was 2.3 percent in October, below the 3.0 percent rate seen a year earlier. Core PCE price inflation which excludes changes in consumer energy prices and many consumer food prices was 2.8 percent in October, lower than its 3.4 percent rate a year earlier. In November, the 12-month change in the consumer price index (CPI) was 2.7 percent, and core CPI inflation was 3.3 percent; both were below their year-earlier rates. Given both the CPI and producer price index data, the staff estimated that total PCE price inflation would be reported as 2.5 percent over the 12 months ending in November and that core PCE price inflation would be 2.8 percent. Recent data suggested that labor market conditions had eased slightly further but remained solid. Average monthly nonfarm payroll gains over October and November were a little below their pace in the third quarter. The staff estimated that job gains were held down by the effects of labor strikes and hurricanes in October and were boosted by a similar amount in November after those effects unwound. The unemployment rate ticked up to 4.2 percent in November, and both the labor force participation rate and the employment-to-population ratio moved down a bit further. The unemployment rates for African Americans and for Hispanics also moved up, and both rates were above those for Asians and for Whites. The ratio of job vacancies to unemployment held steady at 1.1 in November, slightly lower than its level just before the pandemic. Average hourly earnings for all employees rose 4 percent over the 12 months ending in November the same rate as in the previous month. Real GDP posted a solid gain in the third quarter that was similar to its second-quarter pace. Real private domestic final purchases (PDFP) which comprises PCE and private fixed investment and 4 December 17 18, 2024 which often provides a better signal than GDP of underlying economic momentum rose faster than real GDP in the third quarter. Exports rose briskly in the third quarter; import growth was even faster. In the fourth quarter, available economic indicators suggested that real GDP growth remained solid, with growth of real PDFP still outpacing that of real GDP. Imports fell more than exports in October, with real imports of capital goods dropping back after brisk growth earlier in the year. Foreign economic growth picked up in the third quarter, notably in the euro area and in Mexico. Recent economic indicators, however, suggested much weaker momentum in foreign economies in the fourth quarter, with lackluster manufacturing activity and subdued private consumption spending.