WASHINGTON — At their meeting on December 17-18, Federal Reserve officials conveyed their intention to slow the pace of interest rate reductions in light of ongoing elevated inflation rates and concerns regarding potential tariffs and other policy changes.
Minutes from the meeting, which were made public after the typical three-week waiting period, revealed significant divisions among the Fed’s 19 policymakers. Some members advocated for maintaining the key interest rate, while a majority indicated that the decision to cut rates was a tight judgment call.
Ultimately, the Federal Reserve opted to lower its key interest rate by a quarter-point, bringing it to approximately 4.3%. Among the members, Cleveland Fed President Beth Hammack expressed dissent, favoring the maintenance of current rates.
Despite this disagreement, most officials appeared to agree that after three consecutive rate cuts, a careful and measured approach to their key rate was necessary moving forward. Economists interpreted the minutes as a strong indication that the Fed will likely refrain from cutting rates in their upcoming January meeting.
A reduction in the frequency of rate cuts would likely result in sustained higher borrowing costs for consumers and businesses, impacting areas such as home loans, car purchases, and credit card interest.
Meeting minutes indicated that the Fed was either “at or near the point” to ease the pace of policy easing. Moreover, in projections unveiled after the meeting, Fed officials anticipated only two rate cuts for the following year, a reduction from a prior estimate of four.
The minutes also highlighted that nearly all policymakers acknowledged a heightened risk of enduring inflation, as inflation rates have remained elevated in recent data. The Fed attributed some of the inflationary pressure to potential changes in trade and immigration policies.
During the December meeting, the Fed staff economists characterized the economic outlook as particularly uncertain, primarily due to anticipated changes in trade, immigration, fiscal, and regulatory policies from the forthcoming Trump administration, which are challenging to evaluate in terms of their potential economic impact. Consequently, they presented multiple scenarios regarding the economy’s future path.
Forecasts from the staff suggested that the inflation rate for this year would closely align with that of 2024, primarily due to the expectation that proposed tariffs could maintain heightened inflationary pressures.
Following the Fed’s announcement to lower their outlook for future rate cuts, stock markets experienced a significant decline on December 18. Fed Chair Jerome Powell, at a news conference post-meeting, emphasized that reaching the decision to reduce rates was indeed a narrow call.
Powell noted that persistent inflation signs have led many officials to reassess their earlier rate cut expectations. Specifically, the Fed’s preferred inflation measure rose to 2.4% in November year-over-year, surpassing their target. When volatile food and energy prices are excluded, the rate stood at 2.8%.
Additionally, some officials have begun weighing the implications of President-elect Trump’s proposals, like broad tariffs, on inflation and the economy in the upcoming year.
Economists at an investment firm have projected that these tariff proposals could elevate inflation by nearly half a percentage point later this year. Earlier, Fed governor Christopher Waller expressed continued support for rate cuts this year, citing expectations for a gradual decline in inflation towards the Fed’s 2% target. He also conveyed doubts about the possible exacerbation of inflation due to tariffs and maintained his preference for reducing borrowing costs.
Waller finally remarked, during a Q&A session, that he did not believe Trump would ultimately enact the universal tariffs promised during his campaign.
