Federal Reserve officials expressed concern during their December meeting about the potential inflationary effects of President-elect Donald Trump’s proposed policies. This caution has led the Fed to signal a slower approach to interest rate cuts due to the economic uncertainty created by policy changes, according to meeting minutes released Wednesday.
Uncertainty Over Trump’s Trade and Immigration Policies
While Trump was not directly named, the meeting summary referenced concerns multiple times about how proposed shifts in immigration and trade policies could affect the U.S. economy. Since his election victory in November, Trump has indicated plans for significant tariffs on key U.S. trading partners, including China, Mexico, and Canada. He has also expressed intentions to pursue deregulation and mass deportations, adding further uncertainty to the economic outlook.
The lack of clarity on how these actions will be implemented and their potential economic impact has led Federal Open Market Committee (FOMC) members to adopt a cautious stance.
Rising Inflation Concerns
Federal Reserve officials noted that inflation risks had increased, pointing to stronger-than-expected inflation data in recent months and the possible influence of policy changes related to trade and immigration. These concerns played a key role in shaping the Fed’s decision-making process.
The committee voted to lower the central bank’s benchmark interest rate to a range of 4.25% to 4.5%. However, officials also revised their expectations for rate cuts in 2025, reducing the projected number of cuts from four to two, assuming quarter-point adjustments.
Since September, the Fed has already cut rates by a full percentage point. Current market predictions suggest only one or two additional rate reductions this year, with traders placing nearly 100% confidence that the FOMC will maintain current rates at the upcoming January 28-29 meeting.
A Slower Pace of Rate Cuts Expected
The minutes highlighted that the pace of future interest rate cuts is likely to slow down. Federal Reserve members indicated they were approaching the point where it would be appropriate to ease policy measures more gradually.
They also noted that the current policy rate was significantly closer to its neutral value compared to when rate adjustments began in September. Many officials stressed the need for careful decision-making in the coming months, citing several factors: inflation remaining above the Fed’s 2% annual target, strong consumer spending, a stable labor market, and above-average economic growth.
The minutes revealed that most officials believe the Fed’s monetary policy stance is still restrictive enough to allow time for further assessment of inflation trends and economic activity before making additional moves.
Inflation and Economic Projections
Core inflation, the Fed’s preferred measure excluding food and energy prices, was reported at a 2.4% annual rate in November, while the broader inflation measure including those items stood at 2.8%. Despite the Fed’s 2% inflation target, officials anticipate inflation remaining elevated in the near term.
Documents distributed during the meeting showed that most officials expect inflation to gradually return to the 2% target but not until 2027. Near-term risks, however, were still seen as leaning toward higher inflation.
Fed Chair Powell Emphasizes Caution
During a press conference following the December 18 rate decision, Fed Chair Jerome Powell described the current economic environment as unpredictable. He compared the situation to driving on a foggy night or walking into a dark room full of furniture, emphasizing the need to slow down to avoid mistakes.
This cautious mindset was echoed in the meeting minutes, where officials stated that the high level of uncertainty warranted a gradual approach toward a neutral policy stance.
Future Interest Rate Outlook
The Fed’s “dot plot,” which outlines individual members’ expectations for future interest rates, indicated projections for two additional rate cuts in 2026, with the possibility of further reductions afterward. The long-term target for the federal funds rate is projected to settle around 3%.
Federal Reserve officials remain focused on balancing inflation control with economic growth while carefully monitoring how potential policy changes under the incoming administration might affect the financial aspect.
