Inflation concerns, and Trump's policy proposals push the Fed to rethink its rate-cut strategy
Federal Reserve officials, in their December 17-18 meeting, indicated plans to reduce the pace of interest rate cuts in 2025.
Persistently high inflation and uncertainty surrounding proposed US trade and immigration policies, including tariffs, prompted this decision, as reported by BNN Bloomberg.
The minutes from the meeting, released after a three-week delay, revealed divisions among the Fed’s 19 policymakers. Some members supported keeping rates unchanged, while the majority described the decision to cut rates as a “close call.”
Ultimately, the Fed lowered its key rate by 0.25 percent to approximately 4.3 percent. Cleveland Fed President Beth Hammack dissented, favouring no change to rates.
After three consecutive rate reductions, officials broadly agreed it was time to adopt a more measured approach.
According to the minutes, policymakers acknowledged the Fed “was at or near the point at which it would be appropriate to slow the pace of policy easing.”
The decision to reduce cuts means borrowing costs for homes, cars, and credit cards are expected to remain elevated this year.
Projections released after the meeting indicated the Fed plans just two rate cuts in 2025, down from four in previous forecasts.
US Inflation remained a key concern for the Fed. Officials noted “almost all” policymakers see a heightened risk of inflation staying above expectations.
Recent inflation readings showed a rise, with the Fed’s preferred measure reaching 2.4 percent in November. Excluding food and energy, inflation was 2.8 percent.
Officials attributed some inflation persistence to “potential changes in trade and immigration policy,” including proposed tariffs by the incoming Trump administration.
Fed Chair Jerome Powell described the rate-cut decision as a “close call” and highlighted the role of inflation in recalibrating expectations.
Goldman Sachs economists estimate that Trump’s proposed tariffs could push inflation up by nearly 0.5 percent later this year.
Fed staff projected inflation would remain similar to 2024 levels due to the impact of tariffs.
Staff economists presented multiple scenarios to account for policy uncertainty stemming from potential changes in trade, fiscal, and regulatory policies under the Trump administration.
They described the US economic outlook as particularly uncertain.
Christopher Waller, a Fed governor, reiterated his support for rate reductions in 2025, expressing optimism that inflation would decline toward the Fed’s 2 percent target.
Waller downplayed the inflationary impact of tariffs and said he did not believe universal tariffs would ultimately be imposed.
The December 18 rate outlook revision sent stock markets tumbling.
Powell acknowledged that signs of persistent inflation had led many policymakers to scale back expectations for rate cuts.
