Federal Reserve officials are concerned that persistent inflation could stall economic recovery, which is why they paused rate cuts at their January meeting, minutes of the meeting show.
The Federal Open Markets Committee, which oversees decisions on interest rates, said geopolitics and government policy changes loom large on the economy, as does the potential impact of artificial intelligence.
The committee voted 10 to 2 to keep the overnight rate unchanged at a range of 3.5% to 3.75%, pausing rate cuts after three consecutive decreases in 2025. Fed Govs. Stephen Miran and Chris Waller broke from the other governors and favored a quarter-point rate cut.
“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,” according to the minutes.
Fed Chair Jerome Powell said in a subsequent press conference that the stance was “appropriate to promote progress toward both our maximum employment and 2% inflation goals.”
‘Meaningful’ risk that inflation will persist
Some of the 10 who voted to maintain interest rates as they were felt the 75-basis point lowering of the target range last year was helpful.
While there were encouraging signs that employment and real GDP growth were strengthening, they worried inflation could be more persistent than Fed staff who briefed them had anticipated.
Inflation has eased from its 2022 highs, but not across all spending. Tariffs have boosted inflation for core goods, even though inflation seems to be easing for housing services. Government policy and automation could put downward pressure on inflation, but they said there was a “meaningful” risk that elevated inflation will persist.
And so, the majority felt the rates should stay put “until there was clear indication that the progress of disinflation was firmly back on track.”
“They commented that maintaining the current target range of the federal funds rate at this meeting would leave policymakers well positioned to determine the extent and timing of additional adjustments to the policy rate, with these judgments being based on the incoming data, the evolving outlook, and the
balance of risks,” according to the minutes.
Some have since gone public with those concerns, including Fed Gov. Lisa Cook, who has since said she’s critical of interest rate cuts any time soon.
Meanwhile, those who want to see it lowered “expressed concerns that the current stance of the policy rate was still meaningfully restrictive and viewed downside risks to the labor market as a more prominent policy concern than the risk of persistently elevated inflation.”
Fed takes a ‘wait and see’ approach
Realtor.com® senior economist Jake Krimmel said the minutes from the meeting show that there was “a little less” consensus on the economic risks than the vote suggested, and the Fed leaving rates unchanged is more of a “wait and see” than a pause on the way down.
“A few participants, potentially some new voters, are clearly more hawkish on inflation than perhaps last year’s committee was, favoring a ‘two-sided description of the committee’s future interest rate decisions,'” Krimmel said.
“In other words, they wanted to broadcast that even though rates will remain unchanged, the committee should more explicitly say that hikes are still on the table if inflation does not meaningfully improve.”
The minutes point to a continued divide on how best to treat interest rates. The Fed staff noted market-based observers continue to expect to see two 25-basis-point rate cuts this year.
Miran, a Trump appointee, favors aggressive rate cuts. Waller said in a December speech that worsening housing affordability is a drag on spending. He worried that restrictive monetary policy could weigh down economic growth.
President Donald Trump, who has been a critic of the Fed’s cautious approach to interest rates, criticized the interest rate decision, calling Powell a “moron.” He’s since nominated Kevin Warsh to replace Powell as chairman of the board when his term expires in May.
