Federal Reserve officials were divided at a meeting in January, suggesting further interest rate cuts should be halted for now and could resume later this year only if inflation cooperates.
Minutes of the Jan. 27-28 Federal Open Market Committee meeting released Wednesday showed the central bank’s decision to keep the benchmark interest rate unchanged was largely approved, but the path forward looks less uncertain, with members at odds between fighting inflation and supporting the labor market.
“In considering the outlook for monetary policy, several participants commented that if inflation declines as expected, further downward adjustment of the target range for the federal funds rate would likely be appropriate,” the meeting summary said.
But participants disagreed on where policy should go, with officials debating whether to focus on combating inflation or supporting the labor market.
“Some participants commented that it was likely appropriate to leave policy rates unchanged for some time as the Committee carefully assessed future data, and many of these participants judged that further policy easing may not be warranted until there were clear signs that rising inflation was firmly back on track,” the minutes said.
Still others supported the view that rate hikes could be on the table and hoped the post-meeting statement would more closely reflect “a two-sided description of the Committee’s future interest rate decisions.”
Such a statement would reflect that “if the inflation rate remains above the target level, upward adjustment of the target range for the federal funds rate may be appropriate.”
The Federal Reserve slashed benchmark borrowing rates by three-quarters of a percentage point in successive interest rate cuts in September, October, and December. As a result of these developments, the main interest rate will be in the range of 3.5%-3.75%.
The meeting was the first for the new voting district presidents, at least two of whom, Lori Logan of Dallas and Beth Hammack of Cleveland, have publicly said they believe the Fed should be suspended indefinitely. They say inflation is a continuing threat and should be the focus of policy now. The governor and all 19 regional presidents will attend the meeting, but only 12 will be able to vote.
The Fed is already divided along ideological lines, and the rift could deepen if former Governor Kevin Warsh is confirmed as the central bank’s next chairman. Mr. Warsh supports lowering interest rates, a position also supported by current governors Stephen Milan and Christopher Waller. Mr. Waller and Mr. Millan both voted against the January decision, opting instead for another quarter-point cut. Current Chairman Jerome Powell’s term ends in May.
The meeting minutes did not identify individual participants and featured a series of characterizations explaining positions, alternating between “some,” “minority,” “many,” and even two rare references to “the majority.”
While participants generally expect inflation to decline throughout the year, “the pace and timing of the decline remains uncertain.” Both leaders pointed to the impact tariffs are having on prices and said they expect that impact to wane as the year progresses.
“Most participants, however, cautioned that progress toward the Committee’s 2% target may be slower and more uneven than generally expected, and judged that the risk that inflation remains persistently above the Committee’s target is significant,” the document said.
At the meeting, the FOMC, which decides interest rate settings, adjusted some of the language in its post-meeting statement. The changes show that risks to inflation and the labor market are more balanced, allaying previous concerns about the employment situation.
Since the meeting, labor data has been mixed, suggesting a further slowdown in private sector job creation and that the modest growth is coming almost entirely from the health sector. However, the unemployment rate fell to 4.3% in January, and nonfarm payroll growth was stronger than expected.
As for inflation, the Fed’s key personal consumption expenditure price measure is stagnant at around 3%. However, last week’s report showed that the consumer price index, which excludes food and energy prices, was at its lowest level in about five years.
Futures traders believe the best bet is for the next rate cut to occur in June, September or October, according to CME Group’s FedWatch indicators.
