Federal Reserve officials have differing views on the inflation outlook, and the policy path will adjust according to economic data
At the Federal Reserve's December meeting, officials expressed differing views on the persistence of inflation and the interest rate outlook for 2025, emphasizing that policy will be adjusted based on economic data. The meeting minutes indicated that while inflation is generally expected to converge towards the 2% target, higher-than-expected inflation data could prolong this process. The target range for the federal funds rate was lowered to 4.25%-4.5%, with future rate cuts expected to be gradual. Federal Reserve officials are optimistic about the economic situation, believing that economic activity is expanding robustly
According to the Zhitong Finance APP, at the Federal Reserve's December meeting, officials engaged in intense discussions regarding the persistence of inflation, with differing views on the potential level of interest rates in 2025. Policymakers emphasized that monetary policy is not on a preset path and will be adjusted based on economic data and the policies of the Trump administration.
According to the minutes released on Wednesday afternoon, participants generally expect inflation to continue moving toward the 2% target, but they also noted that recent inflation data exceeding expectations and potential changes in trade and immigration policies could prolong this process longer than previously anticipated. The minutes stated, "Several officials believe that the process of declining inflation may temporarily stall or face the risk of stagnation."
At the Federal Open Market Committee (FOMC) meeting held on December 17-18, the committee voted to lower the target range for the federal funds rate by 0.25 percentage points to 4.25%-4.5%, marking the third consecutive meeting of rate cuts. Due to ongoing inflationary pressures, robust economic growth, and uncertainties in fiscal policy, officials expect future rate cuts to be slow and gradual.
According to the updated summary of the quarterly economic projections, Federal Reserve officials expect the median target range for the federal funds rate at the end of this year to adjust to 3.75%-4%, which is 0.5 percentage points lower than the current level. The previous dot plot indicated a projected rate cut of one percentage point by 2025.
Officials expect the inflation level in 2025 to be higher than previously anticipated, with the year-end inflation rate reaching 2.5% based on the price index preferred by the Federal Reserve. The unemployment rate may see a slight increase this year, but the pace will be slower than previously expected. Additionally, the employment data for December will be released on Friday morning.
Overall, Federal Reserve officials hold an optimistic view of the U.S. economy. The minutes noted, "Participants observed that economic activity continues to expand at a robust pace, particularly as economic activity data such as consumer spending generally exceeded expectations. Consumption benefits from a solid job market, rising real wages, and increased household net worth."
In the next two years, the Republican Party will control Congress, with key agendas including limiting immigration, reducing taxes and regulations, and imposing tariffs on trade partners. The minutes mentioned, "All participants agreed that there is a high degree of uncertainty regarding the scope, timing, and economic impact of potential changes in trade and immigration policies."
The decision to cut rates on December 18 was not unanimous. Cleveland Fed President Loretta Mester cast a dissenting vote, preferring to keep rates unchanged. Notably, after the rotation of voting rights in 2025, she will no longer be a voting member, but her concerns do not seem to be an isolated viewpoint.
The minutes stated, "Some participants believe there is a rationale for maintaining the federal funds rate target range unchanged. These participants pointed out that the risks of persistently high inflation have increased in recent months, emphasizing that monetary policy needs to create a financial environment consistent with a sustainable return to the 2% inflation target."
Since the December meeting, the inflation data for November came in below expectations but remains too high. Currently, the Federal Reserve's annual inflation target is 2%, measured by the personal consumption expenditures price index The Federal Reserve will hold another meeting from January 28 to 29, during which the employment and inflation data for December will provide further guidance. As of Wednesday, the interest rate futures market expects the likelihood of the Federal Reserve lowering interest rates at the January meeting to be less than 5%, with the highest probability of a single 0.25 percentage point rate cut occurring in 2025