Fed Minutes Expose Historic Rift on Cuts; Liquidity 'Plumbing' Fix Launched

The Federal Reserve's December meeting minutes, released Wednesday, revealed a central bank grappling with its most significant internal division in nearly four decades. While the FOMC ultimately voted 9-3 to lower the benchmark rate by 25 basis points to a target range of 3.50%-3.75%, the accompanying narrative suggests the path forward is anything but linear.

A “Difficult” Decision

The minutes highlight that the decision to cut was characterized as “finely balanced.” While broad consensus remains that further easing is appropriate if inflation data cooperates, a vocal minority of policymakers is agitating for a pause.

The rift is tripartite:

“A few participants noted that reducing policy rates further… could be misinterpreted as a weakening of the Committees commitment to its 2 percent inflation objective,” the minutes stated.

This division has injected uncertainty into market pricing. While federal funds futures still price in two cuts over the next year, the conviction for an immediate follow-up move has softened.

The $220 Billion Liquidity Pivot

Buried beneath the headline debate on rates was a critical shift in the Fed's balance sheet mechanics. The Fed confirmed the activation of Reserve Management Purchases (RMP).

Acknowledging that banking reserves have declined to near “ample” levels—evidenced by recent spikes in SOFR and other money market rates—the Fed plans to purchase approximately $220 billion in Treasury bills over the coming 12 months.

Market Reaction

The US Dollar firmed slightly following the release, buoyed by the revelation that “some” members favored a pause. However, the confirmation of T-bill purchases provided a floor for risk assets. Elsewhere, the Canadian Dollar (CAD) remained flat in thin year-end trading, lacking distinct catalysts.