Federal Reserve officials expressed concern about inflation and the impact that President-elect Donald Trump’s policies could have during their December meeting. They indicated that they would be slower to cut interest rates due to the uncertainty, according to the minutes released on Wednesday.
Without mentioning Trump by name, the summary of the meeting included at least four mentions of the effect changes in immigration and trade policies could have on the U.S. economy.
Since Trump’s election victory in November, he has signaled plans for aggressive, punitive tariffs on China, Mexico and Canada, as well as America’s other trading partners. He also plans to pursue more deregulation and mass deportations.
However, the extent of what Trump’s actions will entail and particularly how they will be targeted creates uncertainty about what lies ahead, which members of the Federal Open Market Committee say requires caution.
“Nearly all participants believed that upside risks to the inflation outlook had increased,” the minutes said. “As reasons for this assessment, participants cited recent, stronger-than-expected figures on inflation and the likely effects of possible changes in trade and immigration policies.”
FOMC members voted to cut the central bank’s interest rate to a target range of 4.25%-4.5%.
However, they also lowered their outlook for expected cuts in 2025 from four to two in the previous estimate at the September meeting, assuming quarter-point increases. The Fed has cut interest rates by a full point since September current market prices points out that this year it is only one or two steps lower. According to CME Group’s FedWatch gauge, traders estimate a nearly 100% chance that the FOMC will hold at its Jan. 28-29 meeting.
The minutes show that the pace of coming cuts is indeed likely to be slower.
“In discussing the outlook for monetary policy, participants indicated that the Committee was at or near the point where it would be appropriate to slow the pace of policy easing,” the document said.
Moreover, members agreed that “the policy rate is now significantly closer to its neutral value than when the Committee began policy easing in September. In addition, many participants suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters.”
These conditions include inflation rates that remain above the Fed’s annual target of 2%, a solid pace of consumer spending, a stable labor market, and otherwise strong economic activity in which gross domestic product has grown above trend through 2024.
“A substantial majority of participants noted that at this time, with its policy stance still significantly restrictive, the Committee was well positioned to take the time to assess the evolving outlook for economic activity and inflation, including responses of the economy on the Committee’s previous policies. actions,” the minutes say.
The summary further noted that some members had begun to include policy changes in their forecasts, although it was unclear how many members did so.
Officials emphasized that future policy steps will depend on how the data unfolds and will not occur on a set schedule. According to the Fed’s preferred gauge, core inflation was 2.4% in November, and 2.8% when food and energy prices are included, compared to the previous year. The Fed targets an inflation rate of 2%.
In documents distributed at the meeting, most officials indicated that while they see inflation falling to 2%, they do not predict that will happen before 2027 and that near-term risks are tilted to the upside.
At his press conference after the Dec. 18 rate decision, Chairman Jerome Powell likened the situation to “driving on a foggy night or walking into a dark room full of furniture. You just have to slow down.”
That statement reflected that mindset of the meeting’s participants, many of whom “noted that the current high level of uncertainty made it appropriate for the committee to take a gradualist approach as it moved toward a neutral policy position,” the minutes said.
The dot plot of individual members’ expectations shows that they anticipate two more rate cuts in 2026 and possibly one or two more beyond that, eventually pushing the Fed Funds rate down to 3% over the long term.