US FOMC Meeting Minutes

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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 post: FOMC Minutes: Officials Expected To Slow Pace of Rate Cuts After December Meeting post: FOMC Minutes: Officials Expected Slower Progress on Inflation Due To Trump's Trade, Immigration Plans post: FOMC Minutes: Almost All Officials Said Upside Risks to Inflation Had Increased post: FOMC Minutes: Some Officials Saw Merit in Holding Rates Steady in December

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 Wednesday, November 6, 2024, at 10:00 a.m. and continued on Thursday, November 7, 2024, at 9:00 a.m Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Nominal Treasury yields rose notably over the period; factors driving the increases in yields included stronger-than-expected data releases and monetary policy communications that were interpreted as signaling a more gradual pace of policy easing than previously thought. The rise at short maturities reflected increases in both real yields and inflation compensation, while the rise at longer maturities was primarily driven by increases in real yields. Broad equity prices also rose over the period, likely reflecting in part the solid incoming data and consequent lower odds of a weakening in the economic outlook. The VIX, which measures 30-day option-implied volatility of broad equity prices, had moved higher in the period leading up to the November elections and then decreased following Election Day. The manager noted that the federal funds rate path had shifted up notably over the period, as measured by both the options-implied modal path and the futures-implied average path. Although the futures-implied path remained below the options-implied path at longer horizons, the gap between the two paths narrowed, likely reflecting market participants’ judgment that risks had become less skewed toward the downside. In the Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants, a large majority of respondents had a modal expectation of a 25 basis point cut at this meeting and another 25 basis point cut at the December meeting. Further out, there was considerably more uncertainty. For example, although the mean of the average respondent’s probability distribution for the federal funds rate at the trough of this easing cycle was close to the average respondent’s expected longer-run level of the federal funds rate, respondents placed substantial weight on a wide range of outcomes. post: FED MINUTES: SOME PARTICIPANTS SAID FED COULD PAUSE EASING AND HOLD POLICY RATE AT RESTRICTIVE LEVEL IF INFLATION REMAINED ELEVATED || SOME PARTICIPANTS SAID EASING COULD BE ACCELERATED IF LABOR MARKET WEAKENED OR ECONOMIC ACTIVITY FALTERED post: FED MINUTES: PARTICIPANTS ANTICIPATED IT WOULD LIKELY BE APPROPRIATE TO MOVE GRADUALLY TOWARD MORE NEUTRAL STANCE. post: FED MINUTES: MANY PARTICIPANTS SAW RISK OF EXCESSIVE COOLING IN JOB MARKET AS HAVING DIMINISHED SOMEWHAT SINCE SEPTEMBER MEETING || FED STAFF FORECAST CALLED FOR ECONOMIC CONDITIONS TO REMAIN SOLID, AS IN PREVIOUS ASSESSMENT; 2024 GDP GROWTH PROJECTION IS SEEN AS HIGHER post: FED MINUTES: MANY PARTICIPANTS AT THE FED'S NOVEMBER 6-7 MEETING SAID UNCERTAINTY OVER THE NEUTRAL INTEREST RATE LEVEL MADE IT APPROPRIATE TO REDUCE POLICY RESTRAINT GRADUALLY.

The manager turned first to a review of developments in financial markets. Nominal Treasury yields declined notably over the period, driven by weaker-than-expected data releases—especially the July employment report in early August—and policy communications that were seen as affirming expectations that a reduction in policy restraint would begin at this meeting. The decline in nominal yields over the period was primarily attributable to lower expected real yields, but measures of inflation compensation declined as well. Broad equity prices finished the period modestly higher, while credit spreads had come off the very tight levels seen earlier this year but were still narrow by historical standards. Overall, risky asset prices were compatible with continued economic expansion. The manager also discussed the brief episode of elevated market volatility in early August. That episode saw some large moves in U.S. and foreign equity indexes, equity-implied volatilities, the dollar–yen exchange rate, and Treasury yields. These sharp moves appeared to be the result of a rapid unwinding of some speculative trading positions induced by unrelated events—such as the unexpectedly inflation-focused communications from the Bank of Japan (BOJ) in late July and the weaker-than-expected U.S. employment report in early August—and amplified by technical and liquidity factors. All told, the unwinding process was contained, and market functioning recovered relatively quickly. Turning to policy expectations, the manager noted that the market-implied policy rate path shifted down materially. At the time of the September meeting, the modal path for the federal funds rate implied by options prices was consistent wit post: *FED: 'SOME' OFFICIALS WOULD HAVE PREFERRED QUARTER-POINT CUT *FED: 'SUBSTANTIAL MAJORITY' BACKED HALF-POINT RATE CUT post: FED MINUTES: ALMOST ALL PARTICIPANTS AGREED UPSIDE RISKS TO INFLATION HAD DIMINISHED. post: FED MINUTES: SEVERAL DISCUSSED IMPORTANCE OF COMMUNICATING QUANTITATIVE TIGHTENING COULD CONTINUE FOR 'SOME TIME' EVEN AS RATES ARE REDUCED