Meeting minutes
Fed holds the line: no rate cuts until the data justifies
- The minutes of January Federal Open Market Committee (FOMC or Committee) meeting noted that all participants favored holding the fed funds rate unchanged at 4.25%–4.50%. The minutes had a hawkish flavor, with many participants stressing that the Fed could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated.
- Participants indicated that the FOMC was well positioned to take time to assess the evolving outlook, with the vast majority stressing still-restrictive policy as a justification for the hold. Policymakers insisted that policy easing would be conditional on further disinflation progress given the robust labor market.
- This hawkish conditionality was further reflected in the evaluation of risks to the outlook. A majority of participants noted that the Fed should be careful in considering further easing of policy. This was justified given their perception of reduced downside risks to growth and employment, increased upside risks to inflation, uncertainty regarding the level of the neutral rate of interest, the degree of restraint from higher longer-term interest rates, and the impact of the administration’s policy mix.
- With inflation coming in hotter than expected in January and labor market conditions generally solid, we believe data-dependent policymakers will find comfort in a winter pause. We believe the Fed will maintain a wait-and-see approach over the coming months and expect only two Fed rate cuts in 2025, in June and December. The risk is tilted toward less easing if the administration’s policy mix fuels higher inflation and inflation expectations.
Economic conditions and outlook
In discussing economic conditions and the outlook for inflation and employment, FOMC participants noted that inflation had come down significantly over the past two years but remained elevated while labor market conditions stayed solid.
They noted that economic fundamentals remained disinflationary, supported by easing wage growth, well-anchored inflation expectations, waning business pricing power and still-restrictive policy. They further indicated that the labor market was not a source of inflationary pressures, especially given recent productivity gains.
Still, policymakers are attentive to upside risks to inflation given the effects of potential changes in trade and immigration policy as well as resilient consumer demand. This is a particular concern since business contacts in a number of Districts have indicated that firms will attempt to pass on higher input costs arising from potential tariffs to consumers. In addition, a few FOMC participants noted that the federal funds rate may not be far above its neutral level, meaning policy may be less restrictive than believed.
The minutes also reflected the perception of a bifurcated consumer spending outlook, with several participants cautioning that low- to median-income households were experiencing financial difficulties that could constrain their spending abilities.
Staff perspectives
The staff projections were in line with December projections, with the same preliminary placeholder assumptions for potential trade, immigration, fiscal and regulatory policy changes and elevated uncertainty regarding the scope, timing and potential economic effects of such policies.
The staff judged that the risks around the baseline projections for economic activity and employment were roughly balanced. Still, the risks around the inflation outlook were seen as skewed to the upside because core inflation has proved more persistent and because of the impact of trade policy.
Policy framework review
The FOMC launched discussions around the Federal Reserve’s monetary policy framework review focusing on the Statement on Longer-Run Goals and Monetary Policy Strategy and the communication strategy. As Fed Chair Jerome Powell stated, the minutes confirmed that the “2% longer-run inflation goal will be retained and is not a focus of the review.”
During the Fed’s framework review (that will conclude by late summer), policymakers will be “open to new ideas and critical feedback and take on-board lessons of the last five years.” The discussion kicked off with a look back on the Committee’s 2019–20 framework review.
Participants highlighted as areas of consideration the focus on the risks to the economy posed by the effective lower bound, the approach of mitigating shortfalls from maximum employment, and the approach of aiming to achieve inflation moderately above 2% following periods of persistently below-target inflation. Participants emphasized the need for the FOMC’s monetary policy framework to be robust to a wide range of economic circumstances.
Balance sheet management
The Fed is currently allowing up to $25b in Treasuries and $35b in mortgage-backed securities to mature each month without reinvesting the principal.
Various FOMC participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff in light of the potential for significant swings in reserves over the coming months related to debt ceiling dynamics.
Once the Fed’s balance sheet normalization process had come to an end, many participants suggested it would be appropriate to structure the composition of secondary-market purchases in a way that moved the maturity composition of the System Open Market Account portfolio closer to that of the outstanding stock of Treasury debt while also minimizing the risk of disruptions to the market.
Meeting recap
A boring start to a tumultuous year
- The Federal Reserve kept the federal funds rate unchanged at 4.25-4.50%. The unanimous decision came as no surprise given that the December rate cut decision was a much closer call than prior ones. At the time, most participants noted their decision was “finely balanced,” with some even stressing the merits of keeping the fed funds rate unchanged.
- The January policy statement alterations had a hawkish flavor, even if Federal Reserve Chair Jerome Powell downplayed their significance, depicting them as a “language cleanup.” Inflation was described as “somewhat elevated” while the language noting progress toward the 2% inflation target was removed. Labor market conditions are now seen as “solid” instead of “having eased” with the unemployment rate having “stabilized at a low level.”
- Powell reiterated that while monetary policy is still “meaningfully restrictive,” it’s considerably less restrictive following 100 basis points (bps) of rate cuts since September 2024. With policy being well calibrated, he noted that the Federal Open Market Committee (FOMC) is in “no hurry” to make further fed funds rate adjustments. This indicates a relatively high bar for rate cuts, even if it would be misguided to assume policy recalibration is over.
- When pressured to describe conditions that would push the Fed to resume rate cuts, Powell noted sustainable (not just idiosyncratic) inflation progress toward 2%, or weakness in the labor market. In that regard, we wouldn’t be surprised to see policymakers adjust their inflation forecasts and adopt a more dovish stance by March given our expectation for softer inflation data into the spring.
- We expect the Federal Reserve will adopt an extremely reactive approach going forward, with policymakers heavily reliant on inflation and employment data to inform their decisions, potentially over-extrapolating short-term trends.
- Powell confirmed the FOMC is very much in the mode of “waiting to see” what policies are enacted with regards to tariffs, immigration, fiscal policy and regulatory policy. On the trade front, the Fed Chair correctly stressed that it’s extremely difficult to assess the impact of tariffs until we know what tariffs will be imposed, when and on whom, and whether there will be retaliation. He also stressed that the economic backdrop was different in 2018 when the Fed had concluded that a look-through policy approach might have been optimal.
- The Fed will be paying close attention to the impact of the administration’s policy mix on long-term inflation expectations, which Powell said “really matter” in driving policy. He noted that the recent run-up in long-term interest rates was not a result of policy changes, but rather a long-term premium story.” Given the interplay between long-term rates and debt sustainability risks — higher rates could exacerbate fiscal strains and crowd out productive investment.
- Multiple questions to Powell focused on the interaction between President Trump and the Fed. Powell noted that he “will not react or discuss anything an elected politician would say.” When asked about Fed independence from political influence, he insisted that "the public should be confident that we will continue to do our work as we always have."
- With Trump demanding “that interest rates drop immediately,” we foresee intensifying pressure from the administration to influence Fed policy. Fortunately, the Fed has temporarily insulated itself from political pressures with Vice President for Supervision Michael Barr stepping down from his supervisory role but staying on the Board, and Governor Adriana Kugler’s term expiring in January 2026.
- Powell addressed the Fed’s framework review (that will conclude by late summer) noting that the Fed will be “open to new ideas and critical feedback and take on-board lessons of the last five years.” He was quick to stress, however, that the FOMC’s 2% inflation target will be maintained, saying it “has served us well over a long period of time.”
- Powell also addressed the Fed’s balance sheet, saying “the most recent data suggest that reserves are still abundant. Reserves remain roughly as high as they were when runoff began, and the federal funds rate has remained very steady in the target range."
- Following 100bps of easing in 2024, we anticipate the Fed will slow its recalibration efforts as it approaches a neutral stance. We continue to project three 25bps rate cuts in March, June and September 2025, for a total of 75bps of easing. However, risks remain skewed toward less monetary easing, especially in H2, given potential upside risks to inflation from policy changes.