Fed Officials See Solid Growth but Flag Inflation, AI Risks — Evening Brief – 02.18.26
Federal Reserve officials struck a cautiously constructive tone in the minutes from the January 27–28 Federal Open Market Committee meeting, describing a U.S. economy that is expanding solidly even as policymakers remain wary of inflation persistence and emerging financial stability risks tied to AI-driven investment.
The FOMC voted to keep the federal funds rate target range unchanged at 3.50%–3.75%, following three consecutive rate cuts totaling 75 basis points in late 2025. Governors Stephen Miran and Christopher Waller dissented, preferring an additional 25 basis point reduction.
Officials broadly agreed that consumer spending has been resilient and the unemployment rate has held steady in recent months. However, inflation remains a central concern.
“Most participants, however, cautioned that progress toward the committee’s 2% 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 minutes said.
While downside labor market risks have diminished, policymakers stopped short of declaring victory. “While participants generally assessed that, under appropriate monetary policy, the labor market likely would stabilize and then improve this year, they continued to note that the outlook for the labor market remained uncertain,” the summary stated.
Most participants viewed the current rate as near neutral after last year’s easing cycle, though dissenters argued policy remains “meaningfully restrictive” and flagged labor market downside risks as more pressing than inflation persistence.
Looking ahead, officials expect growth to “remain solid” in 2026, supported by favorable financial conditions and potential productivity gains from AI-related investment.
Still, “some participants discussed potential vulnerabilities associated with recent developments in the AI sector,” including elevated valuations and increased debt financing, while “a few participants commented that the financing of the AI-related infrastructure buildout in opaque private markets warranted monitoring.”