During their December meeting, Federal Reserve officials expressed reservations about inflation and the uncertain impact of President-elect Donald Trump’s forthcoming policies. This caution prompted them to take a more measured approach to interest rate cuts, as revealed in the minutes released Wednesday.
Although Trump wasn’t directly named, the summary referenced the potential effects of changes in immigration and trade policy on the U.S. economy at least four times. Since his win in November, Trump has hinted at imposing severe tariffs on China, Mexico, and Canada, along with other trading partners, and has set his sights on deregulation and large-scale deportations.
The uncertainty surrounding Trump’s policies and their direction has created a cloud of ambiguity, prompting members of the Federal Open Market Committee (FOMC) to tread carefully.
“Almost all participants judged that upside risks to the inflation outlook had increased,” noted the minutes. They cited recent surprising inflation readings and the potential impact of shifts in trade and immigration policy as reasons for this assessment.
The FOMC decided to lower the central bank’s main borrowing rate to a target range of 4.25%-4.5%. However, they also scaled down their forecast for interest rate cuts in 2025 from four to two, suggesting gradual quarter-point reductions. Since September, the Fed has slashed the funds rate by a full percentage point, and current market expectations suggest only one or two more reductions this year. According to the CME Group’s FedWatch tool, traders believe there’s an almost certain chance that the FOMC won’t change rates at the January 28-29 meeting.
The minutes confirmed that any forthcoming rate cuts would likely occur at a slower pace. “In discussing the outlook for monetary policy, 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 document stated.
Furthermore, members concurred that “the policy rate was now significantly closer to its neutral value than when the Committee commenced policy easing in September.” As such, many participants emphasized the importance of a cautious approach to future monetary decisions over the coming quarters, citing several factors.
These considerations include inflation rates exceeding the Fed’s 2% target, strong consumer spending, a stable labor market, and robust economic performance, evidenced by above-trend GDP growth through 2024.
“A substantial majority of participants observed that, at the current juncture, with its policy stance still meaningfully restrictive, the Committee was well positioned to take time to assess the evolving outlook for economic activity and inflation, including the economy’s responses to the Committee’s earlier policy actions,” the minutes stated.
The summary also mentioned that some members have started to factor in policy changes in their forecasts, although it’s unclear how many have done so.
Officials emphasized that future monetary policy moves would depend on evolving data and are not preset. The Fed’s preferred measure showed core inflation at a 2.4% rate in November, which rises to 2.8% when taking into account food and energy, year-over-year—a figure surpassing the Fed’s 2% target.
In meeting documents, most officials indicated plans for inflation to fall back to 2% but don’t anticipate this until 2027. They expect near-term risks to lean upward.
At a news conference after the December 18 decision, Fed Chair Jerome Powell put the situation in simple terms: “It’s like driving on a foggy night or walking into a dark room full of furniture. You just slow down.”
This sentiment was echoed by meeting participants, many of whom noted that the current uncertainty warranted a gradual approach as the Committee aimed for a neutral policy stance, as the minutes recorded.
Projections by individual FOMC members, illustrated in a “dot plot,” indicated expectations for two more rate cuts in 2026 and possibly more afterward. These moves are likely to bring the long-term federal funds rate down to 3%.
