Divided Federal Reserve officials at their January meeting indicated that further interest rate cuts should be paused for now and could resume later in the year only if inflation cooperates.
While the decision to hold the central bank’s benchmark rate steady mostly was met with approval, the path ahead appeared less certain, with members conflicted between fighting inflation and supporting the labor market, according to minutes released Wednesday from the Jan. 27-28 Federal Open Market Committee meeting.
“In considering the outlook for monetary policy, several participants commented that further downward adjustments to the target range for the federal funds rate would likely be appropriate if inflation were to decline in line with their expectations,” the meeting summary said.
However, meeting participants disagreed on where policy should head, with officials debating over whether the focus should be more on fighting inflation or supporting the labor market.
“Some participants commented that it would likely be appropriate to hold the policy rate steady for some time as the Committee carefully assesses incoming data, and a number of these participants judged that additional policy easing may not be warranted until there was clear indication that the progress of disinflation was firmly back on track,” the minutes said.
Moreover, some even entertained the notion that rate hikes could be on the table and wanted the post-meeting statement to more closely reflect “a two-sided description of the Committee’s future interest rate decisions.”
Such a description would have reflected “the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.”
The Fed reduced its benchmark borrowing rate by three-quarters of a percentage point in consecutive cuts in September, October and December. Those moves put the key rate in a range between 3.5%-3.75%.
The meeting was the first for a new voting cast of regional presidents, at least two of whom, Lorie Logan of Dallas and Beth Hammack of Cleveland, have publicly said they think they Fed should be on hold indefinitely. Both have said they see inflation as a continuing threat and should be the focus of policy now. All 19 governors and regional presidents participate at the meeting, but only 12 vote.
With the Fed already split along ideological lines, the fissure could grow deeper if former Governor Kevin Warsh is confirmed as the next central bank chair. Warsh has spoken in favor of lower rates, a position also supported by current Governors Stephen Miran and Christopher Waller. Both Waller and Miran voted against the January decision, preferring instead another quarter-point cut. Current Chair Jerome Powell’s term ends in May.
The meeting minutes do not identify individual participants and featured an array of characterizations to describe positions, rotating between “some,” “a few,” “many” and even featured two rare references to “a vast majority.”
Participants generally expected inflation to come down through the year, “though the pace and timing of this decline remained uncertain.” They noted the impact tariffs were having on prices and said they expected the impact to wane as the year goes by.
“Most participants, however, cautioned that progress toward the Committee’s 2 percent objective might be slower and more uneven than generally expected and judged that the risk of inflation running persistently above the Committee’s objective was meaningful,” the document said.
At the meeting, the rate-setting FOMC adjusted some of the language in its post-meeting statement. The changes noted that the risks to inflation and the labor market had come more closely into balance, softening prior worries over the employment picture.
Since the meeting, labor data has been a mixed bag, with indications that private sector job creation is slowing further and that the meager growth is coming almost entirely from the health-care sector. However, the unemployment rate dipped to 4.3% in January and nonfarm payroll growth was stronger than expected.
On inflation, the Fed’s key personal consumption expenditures prices metric has been mired around 3%. However, a report last week showed that the consumer price index when excluding food and energy prices was at its lowest in nearly five years.
Futures traders are placing the best bet for the next cut to come in June, with another in September or October, according to the CME Group’s FedWatch gauge.