The Federal Reserve's recent minutes from the December 17-18, 2024 meeting reveal a cautious approach to interest rate cuts, with officials expressing concerns that the disinflationary process may have stalled. The Fed voted 11-to-1 to lower the policy rate by 25 basis points to a range of 4.25% to 4.50%. Participants described the decision as 'finely balanced,' highlighting increased inflation risks and the potential impact of tariffs on economic growth [1f4c252e][0a67f345].
Federal Reserve Governor Michelle Bowman stated that the December rate cut should be viewed as a final step for now, emphasizing caution regarding future cuts due to ongoing inflation and strong economic activity. She indicated that while she supported the December cut, she could have been persuaded against it [737f5ca2][d7ff9b28]. Kansas City Fed President Jeff Schmid echoed this sentiment, suggesting that interest rates are near their long-term level, where they neither stimulate nor cool demand [288cebd6][d468ba0e]. Schmid expressed optimism about employment and the overall economic strength, citing the US fiscal position and Treasury borrowing as factors that could lead to higher rates [288cebd6]. Fed Chair Jerome Powell emphasized the need for a careful monetary stance, noting that inflation risks remain elevated due to persistent supply chain disruptions and rising energy prices. He compared the current economic conditions to 'driving on a foggy night,' suggesting a 'wait-and-see' strategy for early 2025 [9a1725ae][8ebaa27e]. Projections indicate a median expectation of only one additional quarter-point cut for 2025, down from earlier forecasts of four, with inflation reported at 2.4% in November [728daf8e][1f4c252e].
Cleveland Fed President Beth Hammack dissented during the meeting, advocating for holding rates steady instead of cutting them, reflecting the divided opinions among officials regarding the appropriate monetary policy [66668d9a]. Richmond Fed President Thomas Barkin has stressed the importance of confidence in inflation stability before proceeding with further cuts [83b07382]. On January 5, 2025, various Federal Reserve officials, including Governor Adriana Kugler and San Francisco Fed President Mary Daly, reiterated that the battle against inflation is ongoing. They emphasized the need to balance inflation control with job market stability, as the unemployment rate currently stands at 4.2% [37800a3e].
In a notable update, Federal Reserve Governor Christopher Waller expressed support for further interest rate cuts in 2025, even amidst potential Trump tariffs. Waller believes inflation could approach the Fed's 2% target soon, despite current inflation being at 2.4% [ffe85321][7f2b031e]. He also stated that he does not expect tariffs to significantly impact inflation, a sentiment echoed by Fed Chair Jerome Powell, who acknowledged the uncertainty regarding the effects of tariffs on the economy [ffe85321][7f2b031e].
Goldman Sachs has estimated that Trump's tariffs could raise inflation by nearly half a percentage point, adding complexity to the Fed's decision-making process [728daf8e]. Waller's comments contrast with Wall Street expectations of limited cuts, as he anticipates rising long-term rates due to budget deficit concerns. The current inflation rate is 4.3%, down from a high of 5.3% [7f2b031e].
On January 6, 2025, Federal Reserve Governor Lisa Cook stated that the Fed can afford to be cautious with rate cuts due to a resilient labor market and persistent inflation data. The labor market has shown strength, and inflation remains stickier than anticipated [af81e9fd].
Adding to the cautious sentiment, Federal Reserve Bank of Boston President Susan Collins indicated a preference for fewer rate cuts in 2025 than previously expected, citing strong employment data and persistent inflation. She aligned her outlook with the Fed's December median projection, suggesting one quarter-point reduction this year, down from four anticipated in September. Collins emphasized the importance of patience in assessing economic data and noted that rates are closer to neutral after a one percentage point reduction since September. She expressed expectations for inflation to decline gradually, though with increased risks and uncertainty due to the incoming Trump administration's fiscal policies. Collins also mentioned reduced concerns about the labor market, stating the US economy is in 'a good place' [44043408].
On January 10, 2025, several Federal Reserve officials confirmed that the US central bank will likely maintain current interest rates for an extended period, only considering cuts when inflation significantly decreases. Collins reiterated a cautious approach due to 'considerable uncertainty' in the economic outlook, noting that the Fed's preferred inflation gauge rose 2.4% year-over-year through November, exceeding the 2% target. Kansas City Fed President Jeff Schmid indicated rates may be near a neutral level, while Philadelphia Fed President Patrick Harker expressed readiness for additional cuts in 2025, contingent on economic data. The Fed cut rates three times in 2024, totaling a one percentage point reduction, and is expected to hold rates steady during the upcoming meeting on January 28-29, 2025 [fa634a2e].
In a recent analysis, Brett Angel from the Star Tribune highlighted that the Fed's decision to cut interest rates by a total of 1% over four months (0.50% in September, followed by 0.25% cuts in November and December) has led to a significant increase in the 10-year U.S. Treasury yield, which rose from 3.65% in mid-September to 4.8% in January 2025. Despite the Consumer Price Index (CPI) falling below 3% in July 2024, inflation concerns persist, with the CPI showing a year-over-year increase of 2.9% [a55790dd]. Angel pointed out that past mistakes by Fed Chair Jerome Powell in 2021 contributed to an inflation peak of 9.1% in 2022, raising skepticism in the bond market about the Fed's current monetary policy [a55790dd].
As the FOMC enters its blackout period ahead of the January 29, 2025 meeting, the economic landscape remains complex. The economy entered 2025 with strong momentum, as real GDP grew 2.7% in Q4 2024. However, inflation progress has stalled, with the core PCE deflator increasing to 2.8% in November and December 2024. FOMC members indicate that a pause in rate cuts may be appropriate given the current economic conditions [ed1957f8]. The uncertainty stemming from the Trump administration's policies continues to loom over the monetary policy outlook, with new voting members including Austan Goolsbee, Susan Collins, Alberto Musalem, and Jeffrey Schmid set to influence future decisions [ed1957f8].
In a forecast from January 20, 2025, Guggenheim Partners' CIO Anne Walsh predicted that the Federal Reserve will cut interest rates approximately every quarter in 2025, totaling around 75 basis points to a full percentage point. Walsh noted that the Fed's cuts will be slower than previously expected, as trader expectations have shifted to anticipate only one rate cut this year, down from at least three a month ago. She also commented on incoming President Donald Trump's tariffs, predicting they will rise by less than 10% and be more country-specific. Walsh highlighted the bond market's current trading range and suggested that a 5% yield on the 10-year bond would present a buying opportunity. Furthermore, she expects the S&P 500 to deliver returns of 8%-10% by the end of 2025, driven by global themes like AI and re-shoring of manufacturing, although she acknowledged uncertainties surrounding Trump's policies and potential economic slowdown risks [adb518a8].
As the Fed prepares for its next meetings, market participants are closely monitoring the central bank's decisions, particularly in light of the cautious stances on inflation and the potential economic implications of the incoming administration [70e586c8]. Financial expert Nigel Green has warned that premature cuts could harm the Fed's credibility and advised investors to focus on quality equities and inflation hedges like gold and Bitcoin, while avoiding risky sectors reliant on cheap borrowing [8ebaa27e]. The complexities of the current economic environment further underscore the challenges ahead for both the Fed and the Bank of Canada as they navigate their respective monetary policies amidst mixed economic signals [307e892f][5a4dbcf7].