The Federal Reserve may consider further interest rate cuts if inflation keeps falling, as has emerged from the FOMC December meeting minutes, although officials are currently divided on the interpretation of recent economic data.
In the December 9-10 FOMC meeting, the US Fed, for the third time in 2025, had cut rates by 25bps. According to the minutes, this decision was appropriate because downside risks to employment had increased in recent months and upside risks to inflation had diminished since earlier in 2025 or were little changed.
Focus Back on Inflation
The focus, it seems, has shifted back to inflation. Most participants judged that further downward adjustments to the target range for the federal funds rate would likely be appropriate if inflation declined over time as expected. However, all participants agreed that monetary policy was not on a preset course and would be informed by a wide range of incoming data, the evolving economic outlook, and the balance of risks.
“Policymakers are all over the place because there’s uncertainty in nearly every direction. They want to cut, but inflation is still too high. They’re unsure about data and see no reason to rush. They also know stimulus is coming and is expected to boost GDP in 2026. Markets could view these minutes as slightly hawkish because some doves were on the fence about easing. We could be near the end of this rate-cutting cycle,” says David Russell, Global Head of Market Strategy at TradeStation.
The Risks
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 percent inflation objective.
Jigar Trivedi, Senior Research Analyst at Reliance Securities, says, “Minutes from the Fed’s December meeting noted that most of the FOMC judged that rate cuts are likely to be appropriate next year if inflation eases over time.
Still, policymakers were divided in their assessment of risks between higher inflation and unemployment, with a part of the FOMC displaying greater concern that inflation becoming entrenched may require higher borrowing costs, while others preferred a greater magnitude of rate cuts to curb signs of a softening labor market.”
Participants judged that a careful balancing of risks was required and agreed on the importance of well-anchored longer-term inflation expectations in achieving the Committee’s dual-mandate objectives.
Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller voted in favour of 25bps rate cut.
Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 0.5%.
Austan D. Goolsbee and Jeffrey R. Schmid, preferred no change to the target range for the federal funds rate in the December FOMC meeting.
