The Federal Reserve officials met on December 17-18 and decided to slow down the pace of interest rate cuts due to concerns about persistent inflation and potential policy changes, such as tariffs. The minutes from the meeting revealed a division among the 19 policymakers, with some advocating for keeping the key rate unchanged. Ultimately, the Fed chose to cut the rate by a quarter-point to about 4.3%, with one official dissenting in favor of maintaining the rate.
After three consecutive rate cuts, the Fed agreed that a more deliberate approach was necessary. This decision is expected to keep borrowing costs for consumers and businesses, including for homes, cars, and credit cards, elevated this year. The Fed officials projected only two rate cuts for the following year, down from the previous estimate of four.
The minutes also highlighted concerns about inflation staying higher than expected, partly due to recent readings and potential changes in trade and immigration policies. The Fed's staff economists expressed uncertainty about the economy's future path, especially considering the incoming administration's proposed policy changes.
Fed Chair Jerome Powell mentioned that recent signs of stubborn inflation led many officials to revise their rate cut expectations. Inflation, based on the Fed's preferred measure, rose to 2.4% in November compared to the previous year, exceeding the target. Excluding food and energy categories, inflation stood at 2.8%.
Some officials are also evaluating the potential impact of President-elect Trump's proposals, such as tariffs, on the economy and inflation. Economists at Goldman Sachs estimated that these tariffs could increase inflation by nearly half a percentage point later in the year.
Despite differing views among officials, there is a consensus on the need for a cautious approach to monetary policy in light of economic uncertainties. The Fed's decision to reduce rate cuts has already affected stock markets, with Powell emphasizing that it was a close call.
Looking ahead, the Fed will continue to monitor economic indicators and policy changes to make informed decisions regarding interest rates and inflation targets.
