MNI: Fed Minutes-Upside Inflation Risks Warrant Slower Easing
MNI (WASHINGTON) - Federal Reserve officials in December said it was near time to slow the pace of interest rate cuts, citing rising upside risks to inflation and elevated uncertainty over potential changes in trade and immigration policy from incoming Republican leadership, according to minutes of the meeting released Wednesday.
The FOMC lowered the fed funds rate to a range of 4.25% to 4.5% at the meeting, a third straight cut, but also trimmed their median forecast for rate reductions next year to two from four in September. The vast majority of officials supported the move, though some officials said there was merit in keeping the rate unchanged, the minutes said.
With the fed funds rate now 100 bps lower than its post-Covid peak, "participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing," the minutes said.
"They also indicated that if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would be appropriate to continue to move gradually toward a more neutral stance of policy over time." (See: MNI INTERVIEW: Fed Won't Consider Cuts Until March - Benigno)
UPSIDE RISKS
Disinflationary pressures remain in place and should bring inflation closer to 2% over time, but officials noted upside risks had increased.
"Recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated," the minutes said. A number of Fed officials incorporated placeholder assumptions on policy changes into their projections.
Possible disruptions in global supply chains due to geopolitical developments, a larger-than-anticipated easing in financial conditions, stronger-than-expected household spending, and more persistent shelter price increases were cited as other reasons inflation might stay elevated for longer.
Staff economists' modeling using preliminary placeholder assumptions about potential policy changes showed GDP growth slowing slightly and the unemployment rate rising a bit but staying close to its natural rate, the minutes said.
The high degree of uncertainty calls for a careful approach to decision-making, the minutes said.
"Many participants observed that the current high degree of uncertainty made it appropriate for the Committee to take a gradual approach as it moved toward a neutral policy stance."