According to minutes released Wednesday, Federal Reserve officials voiced concern about inflation and the potential effects of President-elect Donald Trump’s policies during their December meeting. As a result, they indicated that they would be reducing interest rates more slowly.
The meeting summary included at least four references to the potential impact of changes in trade and immigration policies on the U.S. economy, without specifically mentioning Trump.
Trump has hinted at plans to impose harsh, punishing tariffs on China, Mexico, Canada, and other U.S. trading partners since winning the election in November. He also plans to seek mass deportations and further deregulation.
Members of the Federal Open Market Committee stated that prudence would be necessary due to the uncertainty surrounding the scope of Trump’s activities and their precise direction.
According to the minutes, nearly every participant believed that there were now more upside risks to the inflation outlook. Participants mentioned recent higher-than-expected inflation readings and the anticipated consequences of prospective changes to trade and immigration policies as justifications for this conclusion.
Members of the FOMC decided to reduce the benchmark borrowing rate set by the central bank to a target range of 4.25 to 4.5%.
But, assuming quarter-point increments, they also lowered their expectation for anticipated cuts in 2025 from four in the prior estimate at the September meeting to two. Since September, the Fed has lowered the funds rate by one full point, and current market pricing suggests that there will only be one or two more rate cuts this year. According to the CME Group’s FedWatch indicator, traders are giving the FOMC a nearly 100% chance of remaining unchanged during its meeting on January 28–29.
According to the minutes, the rate of reduction in the future is probably going to be slower.
According to the document, participants in the discussion of the monetary policy outlook indicated that the Committee was at or close to the point where it would be prudent to slow the rate of policy easing.
Members also concurred that, compared to when the Committee started policy easing in September, the policy rate was now much closer to its neutral value. Many participants also indicated that a number of reasons highlighted the necessity of making monetary policy decisions with caution in the upcoming quarters.
These factors include a steady pace of consumer spending, a stable job market, inflation readings that stay above the Fed’s 2% annual objective, and generally robust economic activity, with the gross domestic product expanding at an above-trend rate through 2024.
According to the minutes, a significant majority of participants noted that the Committee was in a good position to take some time to evaluate the changing outlook for inflation and economic activity, including the economy’s reactions to the Committee’s previous policy actions, at this point in time, when its policy stance was still significantly restrictive.
The summary also mentioned that while it was unknown how many members did so, some had started to include policy changes in their estimates.
Officials emphasized that there is no defined timeline for future policy changes, which will depend on how the data develops. In comparison to the previous year, core inflation, as measured by the Fed’s preferred gauge, was 2.4% in November and 2.8% when food and energy costs were taken into account. The Fed aims for 2% inflation.
According to materials distributed during the conference, the majority of officials stated that although they anticipate inflation to decline to 2%, they do not see this happening until 2027 and instead anticipate that short-term risks would be positive.
During his news conferenceChair Jerome Powell compared the scenario after the rate decision on December 18 to driving on a cloudy night or entering a dark room filled with furniture. Simply slow down.
According to the minutes, the statement matched the attitude of the attendees of the meeting, many of whom noted that the Committee should proceed gradually as it moved toward a neutral policy stance because of the high level of uncertainty that exists at the moment.
Individual members estimate two more rate cuts in 2026 and perhaps one or two more after that, bringing the long-run fed funds rate down to 3%, according to the dot plot of their expectations.
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