The Federal Reserve officials have voiced apprehensions about the potential inflationary impact stemming from President-elect Donald Trump's policies. During a recent meeting, policymakers highlighted the uncertainties introduced by Trump's economic actions and indicated a strategy to move more cautiously with interest rate cuts. The minutes from this meeting reveal that the pace of future interest rate reductions is anticipated to be slower, reflecting the prevailing uncertainty.
The Federal Reserve has already cut a full point off the funds rate since September, with current market pricing suggesting just one or two additional rate reductions this year. The Fed aims to maintain inflation at a target of 2%, yet their preferred measure shows core inflation running at a 2.4% rate as of November. When including food and energy prices, this figure rises to 2.8%. These indicators suggest a challenging path ahead for the Fed as they navigate economic uncertainties.
A substantial majority of participants acknowledged that the Federal Open Market Committee (FOMC) is well-positioned to take time in assessing the evolving economic outlook and inflation pressures. The "dot plot," which reflects individual members' expectations, forecasts two more rate cuts in 2026, with an additional one or two possible thereafter. Members also predict the long-run federal funds rate will stabilize at around 3%.
The policy rate is now significantly closer to its neutral value compared to when policy easing began in September. The Committee voted to lower the central bank's benchmark borrowing rate to a target range of 4.25%-4.5%. This adjustment indicates a more cautious approach amidst the economic uncertainties posed by new fiscal policies.
In September, the Fed projected four cuts in 2025, but recent adjustments have reduced this outlook to two expected cuts. This change reflects a more conservative stance as officials anticipate inflation gravitating down to 2% by 2027.
Chair Jerome Powell used a metaphor to describe the current economic situation, comparing navigating these uncertainties to "driving on a foggy night or walking into a dark room full of furniture." This vivid description underscores the challenges faced by policymakers in maintaining economic stability amid unpredictable policy shifts.