The minutes of the December 2024 interest rate meeting showed that although the interest rate was cut by 25 basis points after the meeting, a few Federal Reserve officials were in favor of not cutting interest rates, and most of them "felt it was difficult to make a choice" when making the decision.
Article author: Zeng Jia
Source: (Caixin)
On January 8, 2025, the Federal Reserve released the minutes of its interest rate meeting held in mid-December 2024. The minutes showed that Fed officials expressed concerns that future policies of US President-elect Trump might stimulate a rebound in US inflation, especially his tariffs and crackdown on immigration. Due to these uncertainties, central bank officials plan to slow down the pace of interest rate cuts in 2025.
Although the minutes avoided naming Trump, it emphasized at least four times the potential impact of changes in immigration and trade policies on the U.S. economy.
The minutes stated: 'Almost all participants believed that the upside risks to U.S. inflation have increased. Recent inflation data has been stronger than expected, and potential changes in trade and immigration policies could affect the inflation trend.'
The inflation indicator that the Federal Reserve is focused on—the Personal Consumption Expenditures Price Index (PCE)—rose 2.4% year-on-year in November 2024, with the core PCE, excluding food and energy prices, rising 2.8% year-on-year.
Federal Reserve Chair Powell stated in early December 2024 that it is still unclear how large the tariffs implemented by Trump will be, when they will be implemented, and how long they will last, as these tariff ideas have not yet materialized. The Federal Reserve cannot formulate corresponding policies, but it is modeling these tariff proposals to assess potential impacts.
Powell emphasized that regarding the immigration and tariff issues that Trump is most concerned about, the Federal Reserve has 'no opinion of its own.'
He also pointed out that the new round of tariff shocks may differ from the trade conflicts of 2018, as U.S. inflation was very low during the first round of trade friction, and U.S. companies had little experience in passing on the costs of rising prices to consumers. However, post-COVID-19, the experiences and psychology of U.S. companies and consumers have changed.
Tom Barkin, President of the Richmond Fed in Virginia, recently stated that the economic situation in the United States over the past two years indicates that even with rising prices, U.S. consumption remains quite strong. Therefore, if Trump raises tariffs in his second term, American businesses may be less hesitant to raise prices to cope with the tariff challenges.
On the day the minutes were released, Federal Reserve Governor Christopher Waller stated that despite the risk of inflation reigniting, he still expects U.S. inflation to continue to decline in 2025, and the Federal Reserve will also be able to continue lowering interest rates.
At the December 2024 meeting, the Federal Reserve unsurprisingly lowered the interest rate by 25 basis points, bringing the federal funds rate range down to 4.25–4.50%.
The minutes show that most of the 19 participating officials supported this interest rate cut decision, but some attendees hoped to maintain the current level of interest rates.
Most officials also stated that they found it very difficult to make trade-offs when considering the interest rate decision this time.
The minutes indicate that the pace of future interest rate cuts by the Federal Reserve will slow down. 'When discussing the future of monetary policy, participants noted that the Federal Reserve is currently at or close to an appropriate time to slow the pace of policy easing. Compared to the start of the easing cycle in September 2024, U.S. rates are now significantly closer to neutral rates.'
Participants pointed out that multiple factors highlight the necessity of cautiously formulating U.S. monetary policy in the coming quarters, such as inflation rates still above the Federal Reserve's target of 2%, strong consumer spending, a robust labor market, and economic activity still expanding at a pace above the trend line.
Officials stated that since current interest rates still impose significant restrictions, the Federal Reserve is fully capable of patiently assessing the changing economic growth and inflation outlook, including the U.S. economy's lagged response to past interest rate policies. Future policy actions will still depend on economic data rather than following a predetermined roadmap.
According to the updated personal expectations of Federal Reserve officials regarding future interest rates discussed at this meeting, the Federal Reserve is expected to cut rates twice in 2025, which has been halved from the four cuts expected in September 2024.
It is expected that there will be two more interest rate cuts in 2026, and possibly one to two more after 2026. Ultimately, the Federal Reserve will maintain the interest rate level around 3%.
The CME Group's FedWatch Tool indicates that the market currently estimates only one interest rate cut in 2025. This cut may occur in June. The market generally expects that the Federal Reserve will not cut rates at the upcoming January 2025 meeting.