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Federal Reserve officials have indicated that the US central bank will have to take a “careful approach” to reducing interest rates due to the growing risk that inflation will remain higher than the 2 percent target.
In minutes from the Fed's December meeting released Wednesday, officials noted heightened policy uncertainty as Donald Trump's second term in office is set to begin, and indicated that the pace rate contractions may start to slow down or even stop.
“Participants indicated that the committee was at or near the point where it would be appropriate to slow down the pace of the reduction policy,” the minutes say.
“The majority of participants noted that, with the current stance of monetary policy very loose, the committee may take a more cautious approach in considering adjustments to the stance of monetary policy,” the minutes said.
In December, i Fed cut its key interest rate by a quarter-point to 4.25-4.5 percent, a full point lower than in September. But officials predict there will be just two more cuts in 2025, and the US central bank could suspend the rate-cutting cycle at its meeting later this month.
Fed officials' warning about future rate cuts is driven by concerns about US inflation, which has given rise to concerns among economists that Trump's stimulus plan, tax cuts and immigration could accelerate inflation again.
According to the minutes, Fed officials believe that “the probability that high inflation will be more persistent has increased” – and it was a serious risk to the outlook.
“Participants expect that inflation will continue to 2 percent, although they note that further readings can be expected with inflation, and the effects of possible changes in trade policy and immigration, suggest that the process may take longer than previously expected.”, it said. minutes.
However, some officials signaled that they still expect US monetary policy to be loosened, and dismissed concerns about the impact of the payments.
“I will support continuing to reduce our policy rate through 2025,” Christopher Waller, Fed governor, said in remarks at the OECD in Paris on Wednesday, adding that he did not expect the tariffs to have a “significant or sustained” impact on inflation. .
“The extent of further tapering will depend on what the data tells us about progress toward 2 percent inflation, but my bottom line is that I believe further tapering will be appropriate,” he said, referring to the Fed's inflation target.
US government bond markets were little changed after the release of the minutes, with the two-year Treasury yield flat at 4.29 percent and the benchmark 10-year yield up 0.02 percent to 4.7 percent. Yields rise as prices fall.
In equity markets, the S&P 500 moved between small gains and losses. Following Wednesday's minutes, investors were betting that the central bank would introduce a first-quarter rate cut in July, in line with prices earlier in the day.