Fed minutes hint at difficulty in further rate cuts
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By Howard Schneider
WASHINGTON (Reuters) – Federal Reserve officials have been signaling that further interest rate cuts are on hold for now given slowed progress on inflation and a still-strong U.S. economy, but minutes from the central bank’s December meeting may show just how deeply that sentiment is shared among policymakers facing a newly uncertain economic environment under the incoming Trump administration.
After cutting rates by a quarter of a percentage point at the Dec. 17-18 meeting, Fed Chair Jerome Powell said policymakers could now be ‘cautious’ about further reductions, and noted that some officials had begun approaching upcoming decisions as if they were ‘driving on a foggy night or walking into a dark room full of furniture’ because of uncertainty around the impact of President-elect Donald Trump’s tariff, tax, and other proposals.
The minutes, to be released at 2 p.m. EST (1900 GMT) on Wednesday, may help clarify how policymakers will approach further rate reductions. Projections issued after the December meeting showed officials anticipating just a half percentage point worth of rate cuts this year, compared to a full percentage point as of September.
"The minutes ‘are likely to fully reflect this relatively hawkish viewpoint,’" analysts from Citi wrote. "This would include discussion of concerns that inflation could remain persistently elevated if policy rates do not remain suitably restrictive,’ and perhaps discussion as well that the rate of interest needed to fully return inflation to the Fed’s 2% target has moved higher.’
"That would be part of the rationale for the committee now planning to slow the pace of rate cuts," the Citi team wrote.
In new comments on Wednesday, Fed governor Chris Waller said he still feels more rate cuts are coming this year, though the timing and magnitude remain uncertain. He emphasized the importance of maintaining financial stability while navigating the complexities of an evolving economic landscape.
"The incoming president has a different approach to policy implementation compared to the current administration," Waller stated. "We need to be prepared for a period where the pace and direction of policy changes will not only depend on the Fed’s assessment of conditions but also on developments within the Trump administration."
The Federal Reserve’s decision to hold off on aggressive rate cuts despite slowing inflation signals a cautious approach, reflecting a desire to avoid unnecessary volatility in financial markets. However, analysts note that the central bank is closely monitoring economic indicators such as jobless claims and consumer spending, which could provide further clues about its policy direction.
Policymakers have also been discussing ways to support businesses and households amid uncertainty, including potential measures to boost infrastructure investment and stimulate domestic demand. These discussions are expected to shape the Fed’s thinking in the coming months.
The incoming Trump administration has signaled a desire for greater regulatory oversight of financial institutions, potentially raising concerns about increased government interference in markets. This could impact the Fed’s ability to maintain its independence and credibility, according to some experts.
In light of these challenges, Fed officials have emphasized the importance of maintaining a balanced approach to policy-making. They have also stressed the need for close collaboration with state and local governments to address issues such as infrastructure investment and economic growth at the regional level.
The Federal Reserve’s cautious stance on rate hikes, despite recent signs of economic stability, reflects a commitment to avoiding complacency. As the year progresses, policymakers will need to carefully monitor developments in both domestic and global markets to ensure sustained financial stability.
In summary, the Fed’s December meeting underscores the complexity of navigating an uncertain economic environment under a new administration. Policymakers are signaling a desire for caution while maintaining a focus on long-term goals such as inflation control and sustainable growth. The outcome of the December meeting will likely shape the Fed’s policy direction in the coming months, with careful attention paid to both domestic developments and external factors.
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