In recent times, the pulse of the financial markets has been heavily influenced by the actions and decisions of the Federal ReserveThe pivotal moment we observed last month, often referred to as the "hawkish rate cut," sent ripples throughout the economic landscape, indicating a divergence amongst Fed officials regarding the direction of future monetary policiesTonight, the much-anticipated minutes from their latest meeting will provide crucial insights into the anticipated path for interest rates in 2025.

At precisely 3:00 AM Beijing time on Thursday, the Federal Reserve is set to release the minutes from its final 2024 meetingThis statement is expected to shed light on the officials’ perspectives concerning economic growth, interest rates, and inflation trends in the coming yearsThe focus will largely pivot around the level of disagreement among the officials, discussions about neutral interest rates, assessments on inflation and employment, along with contemplations on the impacts of government policies.

To begin with, we see the rift among the officials becoming evident during the decision-making process

The Fed's decision to cut rates on December 18 did not enjoy unanimous supportBeth Hammack, the president of the Cleveland Fed, cast a dissenting vote, indicating her inclination to maintain the current interest rate levelsAs she will not be serving on the Federal Open Market Committee (FOMC) in 2025, it is important to note that four new regional Fed presidents will take their place, potentially altering the dynamics of future discussions.

Furthermore, the evaluation of inflation and the labor market by Fed officials has been under the spotlightThey anticipate that inflation will persist longer than previously expected, predicting that by year-end, the preferred inflation measure, PCE, will reach 2.5%. Citigroup estimates indicate that future minutes will likely mirror a relatively hawkish stanceThere may be robust discussions highlighting concerns that unless policy rates remain sufficiently restrictive, inflation could continue to remain elevated.

When it comes to the labor market, Citigroup suggests that most officials may still characterize it as "solid," although some are likely to note a very gradual softening trend

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They also envision a slight uptick in the unemployment rate this year; however, the increase is anticipated to happen at a much slower pace than earlier projections suggested.

Additionally, some hawkish voices may emerge suggesting that neutral interest rates have indeed risen, which could mean that policy rates are now closer to this level than previously thoughtThis view could provide some justification for the Committee's current plans to slow down the pace of rate cuts.

Attention must also be paid to the Fed’s balance sheet reduction strategyThe liquidity conditions in the market remain notable; despite occasional fluctuations, liquidity is likely to remain abundant, acting like a vital "lifeblood" for the financial systemHowever, Fed officials are acutely aware of the delicate and crucial nature of liquidity managementTherefore, in light of the significant upcoming meetings, it is probable they will concentrate on strategies surrounding balance sheet management, considering a tempered approach reducing the asset-purchasing activities to ensure liquidity stays within an ideal range

Notably, in the December meeting, they decisively lowered the reverse repo rate by five basis points, a significant move which is expected to be recounted as a necessary recalibration to the pre-pandemic norm in the upcoming minutes.

Lastly, discussions in the minutes might cover the implications of policy, focusing on how newly considered government policies could pose potential upward risks to growth and inflationFor example, Richmond Fed President Barkin recently articulated a belief that the labor market will tighten, contributing to heightened business activitiesThere may be particular emphasis on tariffs as a potential inflationary risk, with expectations that at least "some" officials would interpret them as a one-time price level effect, not necessarily meriting a tighter monetary stance.

This past December, all eyes in the global financial markets were focused squarely on the Federal Reserve

In that critical meeting, the Fed made a bold move by cutting rates for the third consecutive time, delicately lowering the federal funds rate target range by 25 basis points, bringing it to a range of 4.25% - 4.5%. Simultaneously, acknowledging the complex economic conditions and various uncertainties, the Fed also revised its rate cut expectations downwards, striving for a more accurate and practical policy calibrationFollowing this, in their updated quarterly economic forecasts, Fed officials projected that by the conclusion of 2025, the median federal funds rate target range would tumble to about 3.75% - 4.0%, reflecting a decrease of 50 basis points from the current level.

The market's expectations for rate cuts also quickly declined; as of Tuesday, futures markets indicated that there is less than a 5% chance of a rate cut at the upcoming January 28-29 meeting, with only one expected 25 basis point cut throughout 2025 being most plausible.

In their latest report, Citigroup summarized the outlook in a hawkish light, suggesting that there is a tendency among several Fed officials not to cut rates during the meeting, with concerns about persistently high inflation expected to be prominently highlighted in the minutes