‘Almost all participants judged that upside risks to the inflation outlook had increased,’ the meeting summary states.
Minutes from December’s policy meeting show that Federal Reserve officials expect inflation to continue moving toward the central bank’s 2 percent target. Still, officials believe the process could be slower amid upcoming changes to immigration and trade policies, the minutes show.
While policymakers did not reference President-elect Donald Trump by name, the meeting summary highlights concerns surrounding the uncertainty of the incoming administration’s policies.
The Federal Open Market Committee (FOMC) meeting minutes, released on Jan. 8, contain various allusions to the potential economic impacts of adjustments to trade and immigration policies.
Meeting participants expect next year’s inflation path to emulate last year’s trend. Based on trade policy assumptions, inflation is forecast to reach the institution’s 2 percent target by 2027.
“Almost all participants judged that upside risks to the inflation outlook had increased. As reasons for this judgment, participants cited recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy,” the minutes read.
“The risks around the inflation forecast were seen as tilted to the upside, as core inflation had not come down as much as expected in 2024 and the effects of trade policy changes could be larger than the staff had assumed.”
The president-elect has pledged to introduce 10 to 20 percent universal tariffs on all U.S. imports and 60 to 100 percent levies on Chinese goods.
Since winning the November 2024 election, Trump has threatened to impose sizable tariffs on goods from Canada, Mexico, and China over border security and the illicit drug trade. He recently said he would slap tariffs on imports from countries engaged in de-dollarization efforts.
In addition to the trade policy announcements, Trump and his team have vowed mass deportations of illegal immigrants.
Federal Reserve Chair Jerome Powell stated last month that it is premature to craft monetary policy on the impacts of Trump’s policies because they are yet to be officially outlined or announced. He compared it to “driving on a foggy night or walking into a dark room full of furniture. You just slow down.”
Economists have debated potential inflationary pressures emanating from the president-elect’s suggestions for the U.S. government’s trade and immigration policies.
Outside of these topics, meeting participants stated that services inflation was still too elevated.
“With respect to core services prices, a majority of participants remarked that increases in some components had exceeded expectations over recent months; many noted, however, that the increases were concentrated largely in non-market-based price categories and that price movements in such categories typically have not provided reliable signals about resource pressures or the future trajectory of inflation,” the minutes read.The minutes highlight the central bank’s rate path in the year ahead, indicating a conservative and gradual pace to normalizing interest rates.
Last month, the Fed cut interest rates for the third straight meeting, lowering the benchmark federal funds rate by a quarter point to between 4.25 percent and 4.5 percent.
After the December meeting, financial markets tanked as officials projected fewer rate cuts than initially estimated.
According to the quarterly updated Summary of Economic Projections, monetary policymakers anticipate two quarter-point interest rate cuts in 2025, down from the previous projection of four quarter-point cuts.
The median forecast also suggested a half-point worth of cuts in 2026 and one quarter-point decrease in 2027.
In the longer run, Fed officials expect the median policy rate to be 3 percent, slightly higher than the September forecast of 2.9 percent.
“In discussing the outlook for monetary policy, participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the December meeting summary said.
FOMC members agreed that the policy rate was inching closer to a neutral level—interest rates that neither stimulate nor constrain economic growth—and recommended “the need for a careful approach to monetary policy decisions over coming quarters.”
Powell attributed the hawkish policy tilt to inflation risks.
“As we think about further cuts, we’re going to be looking for progress on inflation,” he told reporters at the post-meeting press conference on Dec. 18. “We have been moving sideways on 12-month inflation.”
Inflation has been inching higher while the Fed has lowered interest rates by a full percent since September 2024.
The December 2024 consumer price index’s annual inflation rate is expected to rise to 2.9 percent next week from 2.7 percent in November 2024.
Jeffrey Roach, chief economist at LPL Financial, says that due to robust growth and a strong labor market, the Fed may view drastic rate cuts as unnecessary.
“A stable job market will squelch the Fed’s appetite for cutting rates aggressively amid nagging services inflation,” Roach said in a note emailed to The Epoch Times.
The November 2024 Job Openings and Labor Turnover Survey report confirmed that the number of job vacancies unexpectedly rose by 259,000 to a seven-month high of nearly 8.1 million.
According to Tom Essaye, founder and president of Sevens Research, the December 2024 jobs report will greatly affect the Fed’s decisions this month and influence the financial markets.
“The answer is the reason why Friday’s jobs report is important (even more important than it normally would be),” Essaye said in a note emailed to The Epoch Times.
“If the answer is ‘yes,’ we should expect a potentially sharp decline in stocks. If the answer is ‘no’ we should expect a relief rally.”
Indeed, all eyes will be on the upcoming employment data. The consensus forecast signals 154,000 new jobs and an unemployment rate of 4.2 percent.
This would likely cement a rate pause at the January FOMC meeting.
According to the CME FedWatch Tool, the futures market strongly anticipates that the Fed will keep interest rates steady later this month.
Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, thinks the Fed could sit on its hands for a few meetings.
“Based on the combination of sticky inflation and a strong labor market, we believe that the Fed may stay on pause for the next few meetings unless there is notable weakness in the labor market or incoming economic data,” Tentarelli said in a note emailed to The Epoch Times.