Fed officials worried about inflation impact from Trump policies, minutes show

WASHINGTON - The reality of US President-elect Donald Trump’s election victory on a platform of aggressive tariffs and deportation of some immigrants landed hard at the Federal Reserve’s meeting in December, with officials raising new inflation concerns and staff suggesting the incoming administration’s plans may slow economic growth and raise unemployment.

Amid an otherwise sanguine outlook of continually slowing inflation, participants at the Dec 17-18 meeting “noted that recent higher than expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated”, according to minutes of that session released on Jan 8.

That uncertainty, along with the full percentage point in interest rate cuts delivered by the central bank’s policy-setting Federal Open Market Committee in 2024, added to arguments for pausing further reductions in borrowing costs.

“Most participants remarked that… the committee could take a careful approach in considering” further cuts, the minutes said in language that suggested a relatively high bar to further rate cuts for now.

In comments this week, US central bank officials, including Fed governor Christopher Waller on Jan 8, said that while they expected more rate cuts in 2025, the pace and extent would depend on upcoming inflation data showing a further turn towards the central bank’s 2 per cent target.

“I believe that inflation will continue to make progress towards our 2 per cent goal over the medium term and that further reductions will be appropriate,” Mr Waller said.

But the minutes reflected tangible concern at the central bank even as much about the incoming administration’s agenda remains in flux.

Fed staff, whose top members present an economic review and outlook as part of each policy meeting, “highlighted the difficulty” of gaming out what lay ahead.

But “after incorporating the recent data and preliminary placeholder assumptions about potential policy changes, real gross domestic product growth was projected to be slightly lower than in the previous baseline forecast, and the unemployment rate was expected to be a bit higher”, the minutes said of staff assessments of the policies that Trump has pledged to pursue after his return to power on Jan 20.

‘Trump-dependent’ Fed

The Fed still proceeded with a quarter percentage point rate cut at its meeting in December, though the minutes described the decision as “finely balanced”, with some participants noting the “merits” of not reducing borrowing costs in the light of what some saw as stalled progress in lowering inflation, as well as rising inflation risks that may lay ahead.

“Several observed that the disinflationary process may have stalled temporarily or noted the risk that it could,” the minutes said.

After the release of the minutes, interest rate futures markets continued to reflect bets that the Fed would keep its policy rate steady in the current 4.25 per cent to 4.5 per cent range at its next couple of meetings, with the first reduction coming in May at the earliest, and the odds of a second cut in 2025 only at 50 per cent.

“Everyone’s in wait-and-see mode over the next few weeks,” said TradeStation global head of market strategy David Russell. “The Fed is no longer data-dependent. It’s now Trump-dependent.” REUTERS