Fed Minutes Show Cautious Approach to Rate Cuts Amidst Inflation Concerns

January 08, 2025 — Minutes released from the Federal Open Market Committee (FOMC) meeting held on December 17-18, 2024, reveal a cautious approach to future interest rate cuts despite acknowledging progress on inflation. The minutes highlight concerns about recent higher-than-expected inflation readings and uncertainties surrounding potential policy changes, leading to a finely balanced debate among policymakers.

The FOMC voted to lower the target range for the federal funds rate by 25 basis points to 4¼ to 4½ percent at the meeting, a move largely anticipated by markets. However, discussions surrounding the outlook for monetary policy emphasized a potential slowdown in the pace of easing.

Key Takeaways:

• Inflation Progress but Concerns Remain:While acknowledging that inflation had eased substantially from its 2022 peak, participants noted it remained somewhat elevated. Recent data showed some monthly price readings higher than anticipated, raising concerns about the pace of disinflation.
• Economic Activity Solid, Labor Market Easing Gradually:The minutes indicated solid economic growth and a gradually easing labor market, with the unemployment rate remaining low. However, some participants noted potential strains on low- and moderate-income households.
• Uncertainty Surrounding Policy Changes:The FOMC expressed significant uncertainty regarding the scope, timing, and economic effects of potential changes in trade, immigration, fiscal, and regulatory policies. This uncertainty influenced individual projections and contributed to varied approaches among participants.
• Balanced Risks but Upside Risks to Inflation Increased:While most participants judged risks to achieving the dual mandate of maximum employment and price stability as roughly balanced, almost all saw increased upside risks to the inflation outlook. Reasons included recent stronger-than-expected inflation readings, potential trade and immigration policy changes, possible supply chain disruptions, and stronger-than-expected spending.
• Gradual Approach to Policy Easing:The FOMC signaled a potential slowdown in the pace of policy easing, emphasizing a data-dependent approach. They indicated a willingness to hold rates at a restrictive level or ease more slowly if inflation remained elevated, but also acknowledged the possibility of faster easing if economic conditions deteriorated.
• Market Expectations and International Developments:Market expectations for future rate cuts were discussed, with participants noting considerable uncertainty among market participants about the path of the federal funds rate in 2025. International developments, including expected policy easing by foreign central banks, were also considered.

Overall, the minutes portray a committee navigating a complex economic landscape. While acknowledging progress on inflation, the FOMC is wary of recent data and potential policy shifts that could reignite inflationary pressures. This has led to a more cautious stance on future rate cuts, emphasizing a data-dependent approach and a willingness to adjust policy as needed.** The committee emphasized that policy decisions were not on a preset course and were conditional on the evolving economic outlook and balance of risks.

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