Divided Federal Reserve officials suggested at their January meeting that further interest rate cuts should be paused for now and could be resumed later in the year only if inflation cooperates.
While the decision to keep the central bank’s interest rate stable was largely met with approval, the path forward appeared less certain as members were conflicted between fighting inflation and supporting the labor market, according to minutes of the Federal Reserve’s Federal Open Market Committee meeting on 27-28 released on Wednesday. January emerges.
“In considering the outlook for monetary policy, several participants expressed that further downward adjustments to the policy rate target range would likely be appropriate if inflation were to fall in line with their expectations,” the meeting summary said.
But participants at the meeting disagreed about where policy should go, and officials debated whether the focus should be more on fighting inflation or supporting the labor market.
“Some participants indicated that it would likely be appropriate to keep the policy rate stable for some time as the Committee carefully evaluates incoming data, and a number of these participants concluded that further monetary easing may not be warranted until there are clear signs that inflation control progress is back on track,” the minutes said.
Furthermore, some even entertained the idea that rate hikes could be on the table and wanted the post-meeting statement to better reflect “a two-page description of the Committee’s future rate decisions.”
Such a description would have reflected “the possibility that an upward adjustment to the target range for the federal funds rate might be appropriate if inflation remains above the target level.”
The Fed cut its key interest rate by three-quarters of a percentage point in consecutive cuts in September, October and December. As a result of these measures, the key interest rate is in a range between 3.5% and 3.75%.
The meeting was the first for a new cast of regional presidents, at least two of whom, Lorie Logan of Dallas and Beth Hammack of Cleveland, have publicly said they believe the Fed should remain on hold indefinitely. Both have said they see inflation as an ongoing threat and should be the focus of policy now. All 19 governors and regional presidents attend the meeting, but only 12 vote.
With the Fed already divided along ideological lines, the divide could widen if former Gov. Kevin Warsh is confirmed as the next central bank chair. Warsh has advocated for lower interest rates, a position also supported by current governors Stephen Miran and Christopher Waller. Both Waller and Miran voted against the January decision, instead favoring another quarter-point cut. Current Chairman Jerome Powell’s term ends in May.
The meeting minutes do not identify individual participants and used a range of characterizations to describe positions, alternating between “some,” “some,” “many,” and even two rare references to “a vast majority.”
Participants generally expected inflation to decline over the course of the year, “although the pace and timing of this decline remained uncertain.” They noted the impact of tariffs on prices and expected the impact to lessen over the course of the year.
“However, most participants cautioned that progress toward the Committee’s 2 percent target could be slower and more uneven than widely expected and considered the risk of inflation persistently above the Committee’s target to be significant,” the document said.
During the meeting, the FOMC, which sets interest rates, adjusted some language in its post-meeting statement. The changes noted that risks to inflation and the labor market had become better balanced, easing earlier concerns about the employment situation.
Since the meeting, labor market data has been mixed, with signs that private sector job creation continues to slow and that meager growth has come almost entirely from the health sector. However, the unemployment rate fell to 4.3% in January and nonfarm payroll growth was stronger than expected.
When it comes to inflation, the Fed’s key measure of private consumer spending is around 3%. However, a report last week showed that the consumer price index, excluding food and energy prices, hit its lowest level in almost five years.
According to CME Group’s FedWatch Indicator, futures traders’ best bet is that the next cut will come in June and another in September or October.