FOMC Adjusts to Potential Trump Policies — Evening Brief – 01.08.25
Most Federal Open Market Committee members backed a 25-basis-point interest rate cut on December 17-18, but most also thought their decisions were “finely balanced,” according to meeting minutes released on Wednesday. To put it another way, the decision to decrease interest rates appeared to be a close call.
All but one of the committee’s voting members voted to reduce the policy rate by a quarter point to 4.25% to 4.50%, bringing the total reduction since September to 100 basis points.
Some participants saw merit in keeping the target range for the federal funds rate unchanged. They suggested that the risk of persistently elevated inflation had increased in recent months. Several of these participants “stressed the need for monetary policy to help foster financial conditions that would be consistent with inflation returning sustainably to 2%.”
Almost all participants believed that the upside risks to the inflation forecast had grown. According to the minutes, officials mentioned recent higher-than-expected inflation readings as well as the predicted effects of prospective trade and immigration policy changes.
Fed staff projected slightly lower GDP growth and a bit higher unemployment rate than the previous baseline forecast after incorporating recent data and placeholder assumptions of potential policy changes from the incoming administration.
FOMC members signaled a slower, more gradual pace of monetary policy easing while assessing incoming economic data and the effects of previous monetary policy initiatives.
While most members voted for the interest rate cut, they signaled they would be more cautious in trimming the federal funds rate further. With inflation remaining elevated and 100 basis points of rate cuts implemented in the past three months, the FOMC participants indicated that they’re “at or near the point at which it would be appropriate to slow the pace of policy easing.”
“A substantial majority of participants observed that, at the current juncture, with its policy stance still meaningfully restrictive, the committee was well positioned to take time to assess the evolving outlook for economic activity and inflation, including the economy’s responses to the committee’s earlier policy actions,” the minutes read.
Since The Fed’s last meeting in December where they issued a ‘hawkish cut’, US Treasury yields have continued to rise and stocks have been sold, while crude oil and gold have strengthened along with the U.S. dollar.
More notably, rate-cut expectations have plummeted back to near the lows from the day of the FOMC decision on December 18, implying a coin toss of one or two more rate cuts this year. Meanwhile, the U.S. yield curve has steepened dramatically, with the US 2-year/10-year yield spread at 41 basis points – its widest level since May of 2022. The market remains significantly more hawkish about future cuts than the Fed.