US Fed minutes reveal deep divide, caution over more rate cuts in 2026

WASHINGTON - Most US Federal Reserve officials saw additional interest rate reductions as appropriate so long as inflation declines over time, though they remained deeply divided over when and how far to cut, a record of the central bank’s December meeting showed.

Minutes of the Dec 9 to 10 Federal Open Market Committee (FOMC) gathering, released on Dec 30, pointed to the difficulty policymakers faced in their most recent decision, which modestly reinforced expectations the Fed will hold rates unchanged when they meet again in January.

“A few of those who supported lowering the policy rate at this meeting indicated that the decision was finely balanced or that they could have supported keeping the target range unchanged,” the minutes said.

Following the minutes’ release, the likelihood of a January cut based on federal funds futures contracts dropped slightly, to about 15 per cent.

The vote in favour of a cut from a finely divided committee showed chair Jerome Powell’s continued influence, according to Santander US Capital Markets chief US economist Stephen Stanley.

“The committee could easily have gone either way, and the fact that the FOMC eased is clear evidence that chairman Powell pushed for a cut,” he said in a note to clients.

Officials earlier in December voted 9-3 to lower their benchmark interest rate by a quarter percentage point for the third straight time, to a range of 3.5 per cent to 3.75 per cent. Governor Stephen Miran voted against the action in favour of a half-point cut, while Chicago Fed president Austan Goolsbee and Kansas City president Jeff Schmid dissented in favour of keeping rates unchanged.

Rate projections for 2025 pointed to an even deeper split among the larger group of 19 policymakers. Six officials signalled their opposition to the rate reduction by recommending the benchmark rate should stand at 3.75 per cent to 4 per cent at the end of 2025 – where it stood before the December meeting.

In line with those projections, the minutes showed that some officials believed “it would likely be appropriate to keep the target range unchanged for some time after a lowering of the range at this meeting”.

While the median rate projection from officials released after the meeting pointed to one quarter-point cut in 2026, individual projections ranged widely. Investors expect at least two reductions in 2026.

Deep division

The minutes continued to point to considerable differences among policymakers over whether inflation or unemployment posed the greater peril to the US economy.

“Most participants noted that a move towards a more neutral policy stance would help forestall the possibility of a major deterioration in labour market conditions,” the minutes noted.

At the same time, it continued, “several participants pointed to the risk of higher inflation becoming entrenched and suggested that lowering the policy rate further in the context of elevated inflation readings could be misinterpreted as implying diminished policymaker commitment to the 2 per cent inflation objective”.

Speaking to reporters following the meeting, Mr Powell suggested the Fed had lowered rates enough to guard against a more serious deterioration in the labour market, while leaving rates high enough to continue weighing on inflation.

Officials lacked the typical level of economic data due to the government shutdown that lasted for all of October and nearly half of November. Policymakers noted, however, that new data could help them in coming weeks.

“Some participants who favoured or could have supported keeping the target range unchanged suggested that the arrival of a considerable amount of labour market and inflation data over the coming inter-meeting period would be helpful in making judgments on whether a rate reduction was warranted,” the minutes said.

Since the meeting, fresh data has done little to resolve divisions at the Fed. In November, unemployment rose to 4.6 per cent, its highest level since 2021, and consumer prices increased by less than expected. Both releases bolstered the case for those supporting lower rates.

But the economy grew in the third quarter at an annualised rate of 4.3 per cent, the fastest pace in two years, likely fanning worries over inflation for those who opposed the December cut. BLOOMBERG