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Fed FOMC Minutes: Uncertainty Around Trump’s Policies Increases Inflationary Risks

The Federal Reserve released the minutes from its December FOMC meeting on January 8. The key highlights are as follows: Inflation May Take Longer to Decline Fed officials noted that the growth rate of core goods and non-housing services inflation has begun to stabilize. While housing services prices remain elevated, they are expected to decline as growth in new lease rents continues to slow, eventually pulling housing inflation downward. Regarding the inflation outlook, officials generally expect inflation to continue moving toward the 2% target. However, they highlighted that higher-than-expected recent inflation readings, along with potential changes in trade and immigration policies, could prolong the disinflation process. Given the significant uncertainty surrounding the scope, timing, and economic effects of potential changes in trade and immigration policies, some officials have incorporated certain policy assumptions into their inflation projections. Labor Market Remains Stable Fed officials broadly agreed that the labor market remains steady. Indicators such as job openings, quit rates, the pace at which unemployed individuals find jobs, and reduced labor turnover reflect a gradual softening in labor demand by businesses. However, low layoff rates indicate that the labor market has not shown signs of rapid deterioration. Looking ahead, most officials anticipate the labor market will remain stable, though some highlighted significant uncertainty regarding its outlook. A few officials noted the potential for further weakening, as recent employment growth may fall below the level needed to maintain the current unemployment rate. Cautious Approach to Monetary Policy Adjustments Officials indicated that the Federal Reserve is at or near a stage where it should slow the pace of monetary easing, given that interest rates have already been reduced by 100 basis points (bps) and are closer to neutral rates than in September. Factors such as elevated inflation, robust consumer spending, reduced downside risks in the labor market, and heightened upside risks to inflation suggest that future monetary policy adjustments should be approached with greater caution. balance sheet reduction According to the Fed's survey, market expectations for the end of balance sheet reduction have been pushed further out, with most participants now anticipating the process to conclude in June 2025 (compared to the previous projection of Q1 2025). Summary As President-elect Trump prepares to reenter the White House, Fed officials anticipate increased inflationary risks due to potential changes in trade and immigration policies. They also expect inflation to take longer to decline than previously projected. Consequently, the Fed is likely to adopt a more cautious approach to monetary policy adjustments in the coming quarters. Following the release of the minutes, FedWatch data indicated that markets maintain a 95% probability that the Fed will keep rates unchanged in January, with the expected rate cut for the year narrowing to 25 bps.