Federal Reserve Officials Cautious on Further Interest Rate Cuts Amid Slowed Inflation Progress
Federal Reserve officials have been signaling that further interest rate cuts are on hold for now, given the slowed progress on inflation and a still-strong U.S. economy. The minutes from the central bank’s December meeting may provide insight into how deeply this sentiment is shared among policymakers facing a newly uncertain economic environment under the incoming Trump administration.
The Federal Reserve reduced rates by a quarter of a percentage point at the Dec. 17-18 meeting, with Fed Chair Jerome Powell noting that some officials were approaching upcoming decisions as if they were "driving on a foggy night or walking into a dark room full of furniture" due to uncertainty around the impact of President-elect Donald Trump’s tariff, tax, and other proposals. Analysts from Citi wrote that the minutes are likely to reflect this relatively hawkish viewpoint, including discussion of concerns that inflation could remain persistently elevated if policy rates do not remain suitably restrictive.
The minutes "are likely to fully reflect this relatively hawkish viewpoint," analysts from Citi said in a statement. "This would include discussion of concerns that inflation could remain persistently elevated if policy rates do not remain suitably restrictive." The Fed’s projections issued after the December meeting showed officials anticipating just half a percentage point worth of rate cuts this year, compared to a full percentage point as of September.
Citi analysts also noted that further discussions may focus on the rate at which interest is needed to fully return inflation to the central bank’s 2% target. This would be part of the rationale for the committee planning to slow the pace of rate cuts, they said. The Fed reduced the policy rate by a full percentage point over its last three meetings in 2024, with the benchmark rate now set in a range of 4.25% to 4.5%.
Economic data since then has remained steady across several important fronts. Growth is still seen at well above 2%, unemployment rates have stayed in the low 4% range, and the Fed’s preferred measure of inflation – known as the personal consumption expenditures price index – was most recently measured at 2.4%. Fed officials who have spoken publicly since the last meeting have said there is no need to rush further cuts until something has changed in the data.
Richmond Fed President Thomas Barkin noted that he felt the Fed should keep credit conditions tight until it’s clear inflation has stably gotten down to the 2% target or there is a significant weakening on the demand side of the economy. New jobs data on Friday will show how employment and wages changed in December, while a separate labor market survey for November painted an overall picture of stability – or at least slow change. There was a small uptick in job openings but a small drop in hiring.
The meeting minutes may also provide more insight into when the central bank plans to end its current effort to reduce the size of its balance sheet. Having shaved about $2 trillion off bond holdings since 2022, officials are widely expected to stop reducing their portfolio at some point in 2025.