Participants at the U.S. central bank's January 28-29 meeting "generally pointed to the upside risks to the inflation outlook," rather than risks to the job market, according to the minutes from the meeting, which were released on Wednesday. "In particular, participants cited the possible effects of potential changes in trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household spending."
While still having faith that price pressures will ease in coming months, "other factors were cited as having the potential to hinder the disinflation process," the minutes said, including the fact that "business contacts in a number of (Fed) districts had indicated that firms would attempt to pass on to consumers higher input costs arising from potential tariffs."
Participants also noted that some measures of inflation expectations, a key concern for the Fed, "had increased recently."
In comments to Yahoo Finance after the release of the minutes, Atlanta Fed President Raphael Bostic walked through the tangle of issues the Fed is trying to unravel. Business leaders are telling Fed officials they want to raise prices but are uncertain how consumers will respond; tariffs may add to costs, but steps to deregulate some industries may offset those pressures.
At this point, Bostic said, the net result for policymakers is less confidence about what comes next.
"I had an outlook that 2025 would proceed at a very positive level. We'd see solid growth. We'd see inflation continue to move to 2%, we'd see labor markets stay solid," Bostic said. "Now, all this potential change ... means that the confidence bands, the precision of that estimate ... has reduced somewhat and we'll just have to see how things play out."
Financial markets were little changed after the release of the minutes, with interest rate futures indicating the Fed's likely first, and perhaps only, rate cut of 2025 would occur in July. U.S. stocks wavered between slight gains and losses.
'NOT HAPPENING ANYTIME SOON'
Policymakers at last month's meeting agreed they should hold interest rates steady until it was clear that inflation, largely stalled since the middle of 2024, would dependably fall to the central bank's 2% target.
The uncertainty surrounding Trump's plans has added to their reluctance to reduce rates any further.
"It's clear from the minutes that rate cuts are not happening anytime soon, and the Fed will likely wait for some of the dust to settle on tariffs before providing better forward guidance," said Ryan Sweet, chief U.S. economist at Oxford Economics. "The minutes support the recent changes to our baseline forecast that the Fed will be cautious this year, cutting rates only once in December."
A "few" officials, Sweet noted, even hinted that there may not be much more room to cut, given the uncertainty about where the Fed's proper stopping point may be.
Fed staff had already changed their outlook at the December 17-18 meeting to show expected slower growth and higher inflation based on "placeholder assumptions" about Trump's likely actions when he began his second term in the White House. The president started providing details in his first days in office, including proposed 25% tariffs on Canada and Mexico, and a lockdown of the U.S.-Mexico border.
The Fed kept its benchmark interest rate in the current 4.25%-4.50% range at its meeting last month, and officials since then have said they are in no rush to cut rates again until they are more certain inflation will decline to the 2% target from current levels around half a percentage point above that level.
DEBT CEILING, FRAMEWORK
In another sign of how fiscal policy may impact central bank decision-making, the minutes said "various" policymakers noted it may be appropriate to consider slowing or pausing the Fed's ongoing shrinking of its balance sheet in light of federal "debt ceiling dynamics."
Current federal funding runs out after March 14, and lawmakers will need to act by the summer to raise their self-imposed debt ceiling or risk a default.
Fed officials used the January meeting to kick off what's expected to be a months-long review of the central bank's policy framework, including potential revisions to the policy statement's focus on the risks to the economy when the benchmark interest rate is near the zero level.
They also made it clear they would not change their commitment to a 2% inflation goal, or to achieving maximum employment.
The review is expected to wrap up by the end of next summer, the minutes said.
