The Federal Reserve's meeting minutes suggest a pause in interest rate cuts, with "almost all" decision-makers believing that Trump's policies may drive up inflation

Key Points:

Almost all attending decision-makers believe that the upward risks to the inflation outlook have increased, partly due to potential changes in trade and immigration policies.

Participants noted that recent inflation data exceeding expectations and the potential impacts of changes in trade and immigration policies indicate that the decline in inflation may take longer than previously anticipated, with many believing that the decline in inflation may temporarily stall or carry such risks.

Participants believe that the Federal Reserve has reached or is close to a point suitable for slowing down easing; many believe that decisions in the coming quarters need to be cautious.

Most decision-makers support a 25 basis point rate cut in December, stating it was a carefully weighed decision, but some believe that not cutting rates could be beneficial.

"New Federal Reserve News Agency": The minutes suggest that Federal Reserve officials will temporarily keep interest rates unchanged, partly due to Trump's potential tariffs, and they anticipate risks of inflation exceeding expectations.

Without mentioning Trump directly, the minutes subtly imply his influence, which may leave the deepest impression from the recent Federal Reserve meeting minutes.

In the minutes of the monetary policy meeting held in December 2024, released by the Federal Reserve on Wednesday, January 7, Eastern Time, officials expressed concerns about inflation exceeding expectations and the potential inflationary impacts of policies following Trump's administration, suggesting they would slow down the pace of rate cuts due to future uncertainties.

Regarding these minutes, Nick Timiraos, a senior Federal Reserve reporter known as the "New Federal Reserve News Agency," bluntly stated that the Fed will not continue to cut rates for the time being. In other words, the minutes suggest a pause in action. Timiraos titled his article: The Federal Reserve minutes indicate that officials are prepared to keep interest rates unchanged temporarily.

The article begins by noting that the minutes show that Federal Reserve officials made a "carefully weighed" decision to cut rates in December, anticipating risks of inflation exceeding expectations, partly due to Trump's potential tariffs.

According to the minutes, when considering future rate cut magnitudes, Federal Reserve officials felt confused about two situations: first, whether the slight strengthening of inflation data last fall indicates more potential upward price pressures; second, whether Trump's promised tariffs would complicate the inflation outlook further.

The decline in inflation may last longer than expected, many warn that the decline may pause

Wall Street Journal noted that the minutes of this meeting did not mention the name of President-elect Trump even once, but explicitly referred to the future U.S. government's trade policies eight times, highlighting Trump's influence in such a "special" manner. Among these eight references, four were when Federal Reserve decision-makers discussed the U.S. inflation and economic outlook, and four were during assessments by Federal Reserve staff.

When discussing the inflation outlook, the minutes stated that attending officials expect the inflation rate to continue to fall towards the Federal Reserve's target of 2%,

"But they pointed out that recent inflation data exceeding expectations, as well as the potential impacts of changes in trade and immigration policies, indicate that this (decline in inflation) process may take longer than previously expected. Several believe that the decline in inflation process may have temporarily stalled, or pointed out the risk of such a possibility."Following the above two sentences, the minutes stated that a couple of participants believed that the positive sentiment in the financial markets and the momentum of economic activity could continue to pose upward pressure on inflation, and then mentioned trade policy:

“All participants believed that the range, timing, and economic impact of policies affecting foreign trade and immigration could become more uncertain.”

In assessing the risks and uncertainties related to the economic outlook, the minutes stated:

“Almost all participants believed that the upward risks to the inflation outlook have increased. Participants mentioned that the reasons for this judgment include recent inflation data being stronger than expected, as well as the potential changes in trade and immigration policies. Other reasons include geopolitical changes that could disrupt global supply chains, a looser financial environment than expected, stronger-than-expected household spending, and more persistent increases in housing prices.

A few participants pointed out that it may be difficult to distinguish between the more persistent effects on inflation and those that may be temporary in the near future, such as the impact of changes in trade policy that could lead to changes in price levels.”

When the Federal Reserve staff mentioned trade policy, it was done three times in the economic outlook, specifically: given the potential changes in trade, immigration, fiscal, and regulatory policies and their uncertain economic impacts, staff emphasized the difficulty in selecting and assessing the importance of these factors to their baseline expectations; because the assumption that the impact of trade policy supports inflation, staff expected inflation to remain roughly flat in 2025 compared to 2024 levels; staff's inflation expectations have an upward bias, partly due to the potential impact of changes in trade policy being larger than staff had assumed.

There was also a mention that the pricing in overseas financial markets reflects the impacts, including potential changes in U.S. trade policy.

The Federal Reserve has reached or is close to a suitable point to slow down easing; decision-making in the coming quarters needs to be cautious

In the resolution statement released after the December Federal Reserve's Federal Open Market Committee (FOMC) meeting, the Fed hinted at slowing down the pace of interest rate cuts in the future. The minutes of this meeting directly mentioned the intention to slow down rate cuts.

In discussing the outlook for monetary policy, the minutes stated: “Participants indicated that the (FOMC) committee has reached or is close to a suitable point to slow down the pace of policy easing.” They also hinted that if the data roughly meets expectations, inflation continues to stabilize downward towards 2%, and the economy remains close to full employment, it would be appropriate to gradually shift towards a more neutral monetary stance over time.

Some participants pointed out that including the December decision, the three meetings from September to December 2024 would collectively cut rates by 100 basis points, and the Fed's policy rate is now significantly closer to neutral levels than when rate cuts began in September. “Moreover, many participants indicated that various factors highlight the need for caution in making monetary policy decisions in the coming quarters.” In the December meeting statement, the Federal Reserve announced, as in the previous meeting, a decision to lower interest rates by 25 basis points, in line with market expectations. Unexpectedly, one voting member opposed this, advocating for keeping rates unchanged, revealing cracks in the unified front within the Fed.

Most decision-makers say the December rate cut was carefully weighed; some believe there are benefits to not cutting rates

The minutes of this meeting also showcased the internal divisions within the Fed. The minutes stated that during discussions on the monetary policy decision for December, the vast majority of participants believed it was appropriate to cut rates by 25 basis points, as they felt that further rate cuts would help maintain the strong momentum of the economy and labor market while continuing to push inflation downward.

“A majority of participants pointed out that their judgment on the appropriateness of the policy action (rate cut) at this meeting was carefully weighed.”

However, immediately following this, the minutes mentioned the voices opposing the rate cut.

“Some participants indicated that maintaining the federal funds rate target range unchanged has benefits. These participants noted that the risks of persistently high inflation have increased in recent months, with several emphasizing that monetary policy needs to help create a financial environment consistent with a sustainable decline in inflation to 2%.”