Fed minutes: Lower inflation needed before many officials will support rate cuts

Federal Reserve Officials Seek Further Inflation Decline Before Additional Rate Cuts

Most Federal Reserve officials want to see inflation fall further before supporting additional interest rate cuts this year, especially if labor market conditions continue to stabilize, according to minutes from January’s policy meeting released Wednesday.

The minutes revealed that the “vast majority” of the 19 participants on the Fed’s rate-setting committee believe the job market has stabilized following last year’s rise in unemployment rates. Most officials also agreed that the central bank’s key rate, currently at 3.6%, is approaching a neutral level that neither stimulates nor restricts economic activity.

During the January 27-28 meeting, officials voted to maintain the current rate after implementing three cuts in late 2023. Two dissenting votes came from Fed governors Stephen Miran and Christopher Waller, who favored another quarter-point reduction.

The minutes highlighted deep divisions within the committee, with several distinct perspectives emerging. Some members indicated that additional cuts would “likely be appropriate” if inflation continues to decline, while others advocated maintaining current rates “for some time,” suggesting a longer pause before any further action.

In a notable shift, several officials expressed support for language in the post-meeting statement that would signal the Fed’s next move could be either a cut or a rate hike if inflation remains above their 2% target. This represents a significant change from previous meetings, when Chair Jerome Powell had indicated rate hikes weren’t under consideration.

Following January’s meeting, Powell signaled that the Fed might wait several months before adjusting rates again. He noted during his press conference that economic conditions and hiring had improved since December’s meeting, adding that the central bank was “well positioned” to evaluate economic developments in the coming months before making additional moves.

The Fed’s decision to maintain current rates runs counter to President Donald Trump’s repeated calls for the central bank to reduce its key rate to as low as 1%, a level few economists support. Fed rate cuts typically lead to lower borrowing costs for mortgages, auto loans, and business financing, though these rates are also influenced by broader market conditions.

Recent economic data suggests the Fed may maintain its cautious stance. Inflation remains elevated according to the Fed’s preferred measures, and January’s employment report showed renewed strength in hiring. Consumer prices grew 2.4% in January compared to a year earlier, not far from the Fed’s 2% target. However, the Fed’s preferred inflation measure, which puts less weight on housing and rental costs, is running higher at approximately 3% year-over-year.

The January jobs report showed employers adding 130,000 positions, the largest gain in over a year, while unemployment dropped slightly to 4.3%. Fed Governor Michael Barr cited this report as evidence of a “stabilizing” labor market alongside above-target inflation, noting that “based on current conditions and the data in hand, it will likely be appropriate to hold rates steady for some time.”

Not all officials share this view. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told CNBC on Tuesday that the Fed could implement “several more” rate cuts this year if evidence emerges that inflation is moving closer to the 2% target.

The mixed signals from economic indicators and differing perspectives among Fed officials suggest a complex decision-making environment as the central bank balances its dual mandate of price stability and maximum employment. Markets and consumers alike will be watching closely for signals in upcoming economic data and Fed communications that might clarify the path forward for monetary policy.