Divided Federal Reserve officials at the January meeting suggested that no more interest rate cuts are needed at the moment, but could be reintroduced later this year only when inflation plays along.
According to minutes released on Wednesday from the January 27-28 Federal Open Market Committee meeting, it stated that while the vote to remain at the central bank benchmark rate was largely unanimous, the future course seemed less optimistic, as members were divided on whether to combat inflation or to favor the labor market.
The meeting summary indicated that “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.”
Eventually, the meeting participants had disagreements on the direction that they wanted the policy to take, and the officials were at loggerheads on whether to fight inflation or to favor the labor market.
The minutes said, “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.”
Furthermore, others even speculated the possibility of rate increases on the table and desired the post-meeting announcement to sound more like “a two-sided description of the Committee’s future interest rate decisions.”
This kind of description would have been in line with “the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.”
In three back-to-back cuts in September, October, and December, the Fed lowered its reference rate of borrowing by three-fourths of a percentage point. Those actions placed the key rate within a 3.5-3.75 percent range.
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 stated that they think Fed might be on hold indefinitely.
They both have indicated how they also witness inflation as a persistent threat, and much attention should be directed towards this by the policy. The meeting involves all 19 governors and regional presidents, yet only 12 of them vote.
If the Fed had a split along ideological lines, the fissure might grow deeper if former Governor Kevin Warsh is confirmed as the next central bank chair. Warsh has advocated a reduction in rates, and he is also backed up by current Governors Stephen Miran and Christopher Waller.
Both Waller and Miran dissented with the January decision and would have preferred a different quarter-point cut. Meanwhile, the current Chair Jerome Powell’s term ends in May.
The meeting minutes failed to name individual participants and were full of characterizations to refer to positions, alternating between “some,” “a few,” “many,” and even featured two rare references to “a vast majority.”
The participants tended to anticipate that inflation would decrease over the course of the year, “though the pace and timing of this decline remained uncertain.”
They observed the effect tariffs were causing on prices and claimed they thought the effect would subside as the year progressed.
The document stated, “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.”
During the meeting, the rate-setting FOMC changed the wording of some of its post-meeting statement. The changes reported that the inflation risks and the labor market risks had become more aligned, alleviating the previous concerns about the employment situation.
Labor data since the meeting has been a bag of mixed fortunes, with signs that the growth in the private sector is further decelerating and that even the already modest growth is branding itself almost solely in the health-care sector.
Therefore, the unemployment rate fell by 4.3 percent in January, and nonfarm payroll growth was stronger than expected. The Fed’s personal consumption expenditures price index, the most important indicator of inflation, has been languishing around 3 percent.
A report last week indicated that the consumer price index without the price of food and energy was at a low point in close to five years. CME Group’s FedWatch gauge reported that the futures traders are making the best bet for the next cut to come in June, with another in September or October.
