Fed Minutes Reveal Inflation Jitters and Policymakers' Cautious Approach

The Federal Reserve's recent minutes show considerable concern regarding the ongoing persistence of inflation and potential changes in policy with the incoming administration. The December meeting held by the Fed highlighted divisions among policymakers about the future of interest rate adjustments.

During the meeting on December 18, the Fed decided to cut rates by 25 basis points, bringing the federal funds rate down to a range of 4.25%-4.5%. The Fed emphasized that any future changes would need to carefully balance the need to control inflation while also supporting economic growth.

According to the minutes, "participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing." This statement reflects the cautious approach that may dominate upcoming decisions.

Rising Inflation Concerns

Although there have been signs that inflation might be easing, the Fed minutes noted that "recent higher-than-expected readings on inflation" suggest that reaching the target rate of 2% may take longer than anticipated. Cleveland Fed President Beth Hammack cast the only dissenting vote against the interest rate cut in December, advocating for a hold on rates at 4.5%-4.75% instead.

Hammack pointed out the "uneven progress" toward the Fed's inflation target, mentioning strong employment levels and overall economic conditions as reasons for maintaining higher rates.

The potential policy changes expected from the new Trump administration have added further uncertainty for Fed officials. Key promises from the campaign, such as revising trade agreements, implementing tariffs, and significant tax reforms, could have important implications for the U.S. economy and inflation.

As the minutes noted, "a number of participants indicated they had incorporated placeholder assumptions regarding potential trade and immigration policy changes into their projections." The Fed is clearly grappling with the uncertainty surrounding the impact of these prospective policies.

Updated Projections for Inflation and Interest Rates

In their December meeting, the Fed also revised its economic outlook, projecting a slower pace of interest rate cuts than previously thought. Instead of the four cuts estimated in September, the Fed now expects just two 25-basis-point rate reductions throughout next year. By the end of 2025, the federal funds rate is anticipated to approximate 3.9%, with a further decrease to about 3.4% in 2026.

Furthermore, the Fed adjusted its inflation forecasts upward. The projected headline Personal Consumption Expenditure (PCE) inflation for 2025 is now expected to reach 2.5%, increased from the prior estimate of 2.1%. Core PCE inflation, excluding volatile food and energy prices, has also been revised to 2.5% from 2.2%.

Market Reactions to Fed Minutes

The markets responded with only mild movements following the release of the Fed minutes, indicating that many investors had already priced in the Fed's more cautious stance. The U.S. dollar index, tracked by the Invesco DB USD Index Bullish Fund ETF (UUP), remained stable around the 109 mark, maintaining a 0.4% intraday gain.

In the equities market, the S&P 500, which can be followed with the SPDR S&P 500 ETF Trust (SPY), experienced a slight upward movement, recovering from earlier losses to end the session marginally higher.

Meanwhile, Treasury yields showed little movement, with the 10-year yield around 4.69% and the 30-year yield stable at 4.93%. These figures indicate a sense of calm within the bond markets.

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Fed, Inflation, Markets