Almost all Federal Reserve officials agreed in their last meeting that “upside risks to the inflation outlook had increased” due in part to the “likely effects” of expected changes in trade and immigration policies under the new Trump administration, according to meeting minutes released Wednesday.
Fed officials approved a 25 basis point interest rate cut at that December meeting, but it was clear from the minutes that many who signed off on those cuts still had concerns about the path of inflation in the near future.
They noted “the likelihood that elevated inflation could be more persistent had increased,” according to the minutes, even though they still expected the Fed to bring inflation down to its 2% goal “over the next few years.”
“As reasons for this judgment, participants cited recent stronger-than expected readings on inflation and the likely effects of potential changes in trade and immigration policy” — a likely reference to plans already floated by President-elect Donald Trump.
Some economists expect Trump’s policies, which could include steep tariffs and deportations of undocumented immigrants, to make any future rate cuts less likely.
The Marriner S. Eccles Federal Reserve Board building in Washington. (AP Photo/Jose Luis Magana, File) ·ASSOCIATED PRESS
Fed officials in December reduced their estimate of 2025 rate cuts to two from a previous estimate of four, based in part on elevated inflation concerns.
Several of the participants in that Dec. 18-19 meeting even “observed that the disinflationary process may have stalled temporarily or noted the risk that it could.”
One official, Cleveland Fed president Beth Hammack, objected to the rate cut “in light of uneven progress in returning inflation to 2 percent” and argued for holding it steady.
Trump heaped more pressure on the Fed Tuesday during a press conference at his Mar-a-Lago club in Florida.
“Inflation is still raging, and interest rates are far too high,” Trump said, arguing that “we are inheriting a difficult situation from the outgoing administration.”
“I believe that inflation will continue to make progress toward our 2% goal over the medium term and that further reductions will be appropriate,” Waller said during a speech in Paris.
Federal Reserve Board of Governors member Christopher Waller. (AP Photo/Patrick Semansky, File) ·ASSOCIATED PRESS
While Waller underscored that tariff proposals raise the possibility of a “new source of upward pressure on inflation,” he noted projections of their economic impact vary widely.
“If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy,” Waller said.
Powell said in December that there are still too many unknowns for the Fed to game out how tariffs could impact setting rates. However, he did say that some Fed officials have begun to factor in Trump’s proposed policies into their policy assumptions.
“We don’t know how big they’ll be, we don’t know their timing and their duration, we don’t know what goods will be tariffed, we don’t know what countries’ goods will be tariffed, we don’t know how that will play into prices,” Powell said in December in New York.
“That’s a partial list of the things we don’t know.”
The Fed minutes released Wednesday noted that all participants of the meeting in December “judged that uncertainty about the scope, timing, and economic effects of potential changes in policies affecting foreign trade and immigration was elevated.”
Fed officials “took varied approaches in accounting for these effects, with “a number of participants” indicating they “incorporated placeholder assumptions to one degree or another into their projections.”
“Other participants indicated that they did not incorporate such assumptions, and a few participants did not indicate whether they incorporated such assumptions.”
Central bank officials will also be paying close attention to inflation as they prepare for their next meeting on Jan. 28-29 following the inauguration of Trump as president on Jan. 20.
The last reading of the Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) price index — showed an easing to 2.4% in November. That is down considerably from a peak of 7.2% in June 2022 but still above the Fed’s 2% goal.
When excluding volatile food and energy costs, the so-called core PCE was down to 2.8% in November — compared with a peak of 5.6% in September 2022.
Waller on Wednesday underscored that two-thirds of prices that comprise the core-PCE index have increased on average less than 2% over the past 12 months through November.
He also said the higher readings on inflation in the first quarter of 2024 will begin to drop out, meaning inflation numbers should start to look significantly better starting in March of 2025.
“If the outlook evolves as I have described here, I will support continuing to cut our policy rate in 2025,” Waller said.
Some of Waller’s other Fed colleagues struck a cautious tone in their comments earlier this week.
Federal Reserve governor Lisa Cook said Monday it makes sense to lower interest rates more gradually given resilience in the job market and stickier-than-expected inflation.
Over the weekend, Fed governor Adriana Kugler and San Francisco Fed president Mary Daly both said that the Fed has more work to do to bring inflation down but that they don’t want to weaken the job market further as they focus on that task.
