Federal Reserve officials indicated last month that they needed to see “further progress on inflation” before any new interest rate cuts, as the US central bank kept monetary policy steady in the face of high uncertainty over the outlook.
According to minutes from the January meeting of the rate-setting Federal Open Market Committee, which was held in the week following Donald Trump’s return to the White House, a majority of US central bankers said they needed to adopt a “careful” approach to any monetary policy changes.
During the meeting, Fed officials judged that it was still appropriate to keep monetary policy at “restrictive” levels, as they worried about the growing “upside risk” to the outlook for inflation, and assessed the impact of the incoming Trump administration’s economic policies.
“Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate,” the minutes said.
Fed officials also signalled that monetary policy was not on any “preset” course, with a range of possibilities ahead.
“Many participants noted that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated, while several remarked that policy could be eased if labor market conditions deteriorated, economic activity faltered, or inflation returned to 2 percent more quickly than anticipated,” the minutes said.
After having cut its main interest rate by 1 percentage point in 2024, the Fed last month held it steady at a range between 4.25 per cent and 4.5 per cent.
Short-term US government bond yields, which track expectations for monetary policy, fell slightly after the release of the minutes on Wednesday. The two-year yield fell 0.03 percentage points to 4.27 per cent.
Wall Street equities inched higher, leaving the blue-chip S&P 500 up by 0.2 per cent.
Economic data released following last month’s FOMC meeting has reinforced expectations that the central bank will hold interest rates steady for the time being, including higher than expected January figures for the consumer price index, a crucial measure of inflation.
The minutes showed that Fed officials were still predicting that inflation would gradually move down towards the central bank’s 2 per cent target, but they expected progress to be “uneven”.
Some officials said “labor market conditions were unlikely to be a source of inflationary pressure in the near future” but they worried that “potential changes in trade and immigration policy” proposed by Trump could “hinder” disinflation along with “strong consumer demand”.
During the Fed meeting, officials also noted that “business contacts in a number of districts had indicated that firms would attempt to pass on to consumers higher input costs arising from potential tariffs” imposed by the Trump administration on imported goods.
