Unlock Editor’s Digest for free
Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
Federal Reserve officials have indicated that the US central bank will have to take a “cautious approach” in further cutting interest rates because of the growing risk that inflation will remain permanently above the 2 percent target.
In minutes from the Fed’s December meeting released on Wednesday, officials noted increased policy uncertainty as Donald Trump’s second term begins and indicated that the pace rate cuts may begin to slow down or even pause.
“Participants indicated that the committee is at or near the point where it would be appropriate to slow the pace of policy easing,” the minutes said.
“Most participants noted that with the stance of monetary policy now significantly less restrictive, the committee could carefully consider adjustments to the stance of monetary policy,” the minutes said.
It’s in December Fed cut its main interest rate by a quarter of a point to 4.25-4.5 percent, one full point lower than it was in September. But officials have forecast just two more cuts in 2025, and the US central bank could pause its rate-cutting cycle at a meeting later this month.
Fed officials’ caution about future rate cuts was prompted by caution about the outlook for US inflation, amid concerns among economists that Trump’s plan for tariffs, tax cuts and immigration could re-accelerate price rises.
According to the minutes, Fed officials believed that “the likelihood that elevated inflation could be more persistent has increased” — and that this is the main risk to the outlook.
“Participants expected inflation to continue to move toward 2 percent, although they noted that recent higher-than-expected inflation readings and the effects of potential changes in trade and immigration policy suggested that the process could take longer than previously expected. . “, it says in the minutes.
However, some officials have signaled that they still expect a fairly aggressive loosening of US monetary policy and dismissed concerns about the impact of tariffs.
“I will support continuing to cut our benchmark rate in 2025,” Fed Governor Christopher Waller said in remarks at the OECD in Paris on Wednesday, adding that he did not expect the tariffs to have a “significant or lasting” impact on inflation.
“The extent of further easing will depend on what the data tell us about progress toward 2 percent inflation, but my bottom line message is that I believe more cuts will be appropriate,” he said, referring to the Fed’s inflation target.
US Treasury bond markets were little changed after the release of the minutes, with the two-year Treasury yield flat at 4.29 percent and the benchmark 10-year yield up 0.01 percentage point to 4.7 percent.
In the stock markets, the S&P 500 closed with a growth of 0.2 percent. After Wednesday’s minutes, investors were betting the central bank would deliver its first quarter-point rate cut of the year by July, in line with prices earlier in the day.
