The minutes from the December meeting of the Federal Reserve reveal officials' concerns about inflation risks and a careful stance towards Trump's policies.
Trump's Policies and Inflation Concerns
The minutes show that Fed officials are vigilant about the aggressive policies that the Trump administration might implement, particularly changes in immigration and trade policies. These include imposing punitive tariffs on countries like China, Mexico, and Canada, deregulation efforts, and plans for large-scale deportations. The high uncertainty in their direction and extent complicates the Fed's decision-making process. The meeting record notes that almost all participants judged the risk of upward inflation expectations to have increased, attributing this to recent higher-than-expected inflation data and potential policy shifts.
Fed Slows Rate Cuts
In the December meeting, the Fed decided to lower the benchmark rate to a target range of 4.25%-4.5%, but the expectation for rate cuts in 2025 was reduced from four in September to two. Market predictions suggest the Fed might implement only one to two rate cuts in 2025, with no action expected at the January 28-29 meeting. The minutes further indicate that future rate cuts will be significantly slower. Participants noted, "The Committee is close to the point where it would be appropriate to slow the pace of policy easing." Moreover, officials unanimously agreed that current policy rates are nearing neutral levels, necessitating more cautious policy adjustments.
Economic Stability and Inflation
Fed officials emphasized that economic stability is another major factor in adopting a cautious policy. While consumer spending remains robust, the labor market is stable, and GDP growth exceeds trend, inflation is still above the 2% annual target. The core inflation rate for November was 2.4%, with the overall rate including food and energy prices at 2.8%. Although the Fed predicts inflation will gradually return to 2%, the minutes suggest most officials believe this target might not be achieved until 2027.
The Fed's minutes suggest that while policy remains accommodative in the short term, adjustments will become more cautious as policy rates approach neutral levels. Balancing inflation risks with economic stability will be central to the Fed's future policy decisions.
