The Federal Reserve may be shifting towards a more cautious approach in its rate-cutting strategy as the U.S. continues to face high inflation risks. A Bloomberg report suggests that, following a rate cut in December, the Fed is likely to adopt a slower pace for further cuts in the months ahead.
Minutes from the Federal Open Market Committee’s December meeting, as reported by the publication, indicate that officials believed the Fed was nearing the point where it would be appropriate to slow the pace of policy easing. The minutes also highlighted that many participants emphasized the importance of taking a careful approach to monetary policy decisions in the upcoming quarters.
What are the key factors influencing Fed rate cut strategy?
Key concerns influencing this strategy included persistent inflation, robust consumer spending, and a reduced likelihood of a downturn in the labour market or broader economy. The Fed lowered its benchmark lending rate by a quarter point during the December meeting, bringing it to a range of 4.25% to 4.5%.
The Fed’s economic outlook also reflected potential shifts under incoming U.S. President Donald Trump, with staff incorporating “placeholder assumptions” that resulted in a slightly slower growth forecast and inflation remaining relatively high. The minutes revealed that several policymakers made similar assumptions in their updated projections, with almost all participants acknowledging increased risks to inflation.
While the Fed expects the U.S. job market to remain strong, officials noted that labour market indicators should be closely monitored. The next monthly employment report from the Bureau of Labor Statistics is expected on Friday.
The December rate cut marked a cumulative reduction of one full percentage point since September. The speed of these cuts prompted dissenting votes in both September and December, which are rare occurrences under Fed Chair Jerome Powell. Powell described the December cut as a “closer call” compared to previous reductions.
The minutes also noted that some participants argued for holding rates steady, while a majority considered the decision to lower rates finely balanced. Cleveland Fed President Beth Hammack dissented, preferring to keep rates unchanged, and updated forecasts showed that three other officials shared her view. Governor Michelle Bowman, who had voted against a half-point cut in September, also preferred a smaller reduction.