At their December assembly, officials from the Federal Reserve aired their concerns about inflation and the potential impact of policies proposed by the then President-elect Donald Trump. The meeting minutes released on Wednesday reveal that due to this uncertainty, they are likely to slow down the rate of interest cuts.
The summary of the meeting, while not directly mentioning Trump, alludes to the effects changes in immigration and trade policies could cause, with at least four references to the potential impact on the US economy.
Since his victory in November, Trump has indicated plans for harsh tariffs on China, Mexico, Canada, and other US trading partners. He also plans to pursue extensive deregulation and mass deportations. However, the specific direction and extent of these actions create a degree of uncertainty about the future, prompting Federal Open Market Committee members to advocate for caution.
In the meeting minutes, the committee noted that almost all participants agreed that the risk of inflation had increased. This increase was attributed to recent higher-than-expected inflation readings and prospective changes in trade and immigration policies.
The FOMC members voted to lower the central bank’s benchmark borrowing rate to a target range of 4.25%-4.5%. Nevertheless, they also downgraded their outlook for expected cuts in 2025 from four to two as per the estimation in September’s meeting, with quarter-point increments assumed.
The minutes suggest a slower pace of cuts in the future, with members agreeing that the policy rate was much closer to its neutral value than when policy easing began in September. They also indicated that a variety of conditions necessitated a cautious approach to monetary policy decisions in the coming quarters.
These conditions included inflation readings consistently above the Fed’s annual 2% target, a steady consumer spending pace, a stable labor market, and strong economic activity with GDP growth above trend through 2024.
Some members started to include policy changes in their forecasts, but the exact number was not specified. Officials emphasized that future policy moves will rely on how data evolves and are not on a pre-set timetable.
The meeting documents show most officials expect inflation to stabilize at 2%, but this is not anticipated until 2027, with near-term risks on the upside. In his December 18 press conference, Chair Jerome Powell compared the situation to driving on a foggy night or navigating a dark, cluttered room, advocating for a slower approach.
The individual members’ “dot plot” expectations anticipate two more rate cuts in 2026, with possibly another one or two after, bringing the long-term fed funds rate down to 3%.
