EconoFACTS

January 08, 2025 | 14:55

FOMC Minutes: Tread Lightly

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

At the December policy meeting, members discussed several reasons for proceeding more cautiously in lowering interest rates. This explains why the median member halved the amount of easing in 2025 to just 50 bps. Topping the list was higher inflation risks, which "almost all members judged...had increased". This reflected not just the recent stickier price data and solid economic growth, but also "the likely effects of potential changes in trade and immigration policy". In addition, the minutes made clear that the closer the Fed gets to perceived rate neutrality, the more nimble it should act. In fact, the decision to cut rates at all in December (by 25 bps) was "finely balanced" for a majority of members, confirming Powell's comment that it was "a close call". (Though not balanced enough for one member, Hammack, who dissented in favour of no change.)

The Fed's staff, based on preliminary assumptions about potential policy changes, lowered its growth outlook slightly, perhaps a nod to the corrosive effect of tariffs. It also said the changes could hold inflation up this year while imparting an upside risk to the outlook. Policymakers cited "the current high degree of uncertainty" about future policies and their impact on the economy and inflation, which is likely another reason to move slowly.

Still, with policy remaining restrictive, the FOMC continues to eye further rate cuts. The minutes said that "if the data came in about as expected, with inflation continuing to move down sustainably to 2 percent and the economy remaining near maximum employment, it would be appropriate to continue to move gradually toward a more neutral stance of policy over time." So, the easing door is still open, but the Fed will need some nudging to go through it.

Bottom Line: The minutes confirm that the Fed will take a more cautious approach to policy easing, cementing expectations of a rate pause in January. We still look for the next cut in March, though much depends on the next few inflation releases and how hard Trump swings the tariff hammer.