Fed Minutes Suggest Steady Rates for Now

The written account of the Dec. 17-18 policy meeting showed officials thought inflation was likely to continue moving down to the central bank's 2% target, but "the process could take longer than previously anticipated" due in part to possible changes to trade and immigration policy.

The "vast majority" of the 19 officials who participated in that meeting thought a quarter-point rate cut was appropriate, the minutes said. But some officials thought there was merit in keeping rates unchanged last month, and a majority had indicated the decision to cut rates was a close call, according to the minutes.

The minutes further suggest officials were broadly comfortable holding rates steady at their coming meeting at the end of this month. "Participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing," the minutes said. Officials thought under their current outlook for economic activity, the Fed could continue to cut rates at a slower pace than they had in recent months.

In projections released at last month's meeting, officials signaled greater doubt about how much further they would lower interest rates, with a majority penciling in two rate cuts this year, down from four in projections released in September.

Officials are puzzling over two developments as they consider how much to continue cutting rates. First, they aren't sure whether somewhat firmer inflation readings last fall suggest that more latent price pressures remain in the economy. Second, they are uncertain over how Trump's promises to impose new tariffs might further complicate the outlook for inflation.

"Almost all participants judged that upside risks to the inflation outlook had increased," the minutes said.

The economic forecast prepared by the Fed's staff of economists also incorporated some initial assumptions about changes to tariffs that would lead inflation to be higher than previously anticipated in 2025 before resuming its recent decline after that.

In addition to the uncertainty over potential policy changes by Trump, who takes office on Jan. 20, Fed officials aren't sure what constitutes a "normal" or neutral interest rate that neither spurs nor slows the economy. For much of last year, their benchmark interest rate sat near a two-decade high, at 5.3%, and nearly all officials thought rates were in restrictive territory.

But after cutting interest rates at their last three meetings by a cumulative percentage point since September, they are less certain over where rates sit relative to an unobservable "neutral" level. At a news conference after last month's meeting, Fed Chair Jerome Powell said officials were ready to slow down cuts because of uncertainty over how restrictive their policy stance would be after having lowered rates by 1 percentage point.

Officials have been trying to pull off a balancing act. They want to prevent the aggressive rate increases of the past two years from unnecessarily slowing down economic activity now that price and wage growth has cooled, but they don't want to undo recent progress on inflation.

Investors in interest-rate futures markets expect the Fed to stay on hold until May or June, according to CME Group.

On Wednesday, Fed governor Christopher Waller said he thought the central bank would be able to keep lowering interest rates this year because he expects inflation to continue making steady progress toward the Fed's 2% goal.

The Fed's preferred inflation gauge was up 2.4% from a year earlier in November. A closely watched measure of so-called core prices, which excludes volatile food and energy items, stood at 2.8%. Slow progress in bringing down core inflation "has led to calls to slow or stop reducing the policy rate," Waller said.

But he said he thought "further reductions will be appropriate" because he expects inflation to keep declining.

Some of his colleagues have called for more caution. Richmond Fed President Tom Barkin last week said he was more focused on the risk that inflation would run above the Fed's target. He cited concerns that businesses might have greater ability to raise prices than they have in the past if new tariffs are imposed.

"Wage and product costs could see pressure," he said. "If they do, given recent experience with inflation, price setters might have more courage to pass costs along."