WASHINGTON: Federal Reserve officials are signaling a more cautious approach to interest rate cuts in 2025, driven by persistent inflation and uncertainty surrounding potential policy changes, including tariffs and immigration reforms.

During the Federal Reserve's meeting held on December 17-18, participants engaged in an in-depth discussion regarding the potential trajectory of monetary policy in the coming months. The deliberations focused on assessing the current economic conditions and determining the appropriate adjustments to the existing policy framework.

Meeting minutes, released three weeks later, revealed a divided stance among the Fed’s 19 officials. While some favored holding the central bank’s key interest rate steady, others supported a quarter-point cut to 4.3%. Cleveland Fed President Beth Hammack dissented, advocating for no changes.

Despite the decision to cut rates, officials broadly agreed that after three consecutive reductions, the Fed should now adopt a more measured approach. Economists anticipate that the Fed is unlikely to implement further cuts at its upcoming January meeting.

Borrowing Costs Likely to Stay Elevated

A slower pace of rate cuts means borrowing costs for consumers and businesses—covering homes, cars, and credit cards—are expected to remain high this year. Several policymakers highlighted that the Federal Reserve is approaching a pivotal juncture where it might be prudent to consider tapering the pace of monetary easing. They emphasized the importance of carefully evaluating the economic data and market dynamics to ensure that any adjustments align with broader economic stability and growth objectives. Projections from the meeting suggest only two rate cuts in 2025, down from an earlier estimate of four.

The minutes also highlighted inflation risks, with “almost all” policymakers expressing concern that inflation could persist at elevated levels. This is partly due to lingering inflation in recent economic data and the anticipated effects of potential trade and immigration policy changes.

Economic Uncertainty Amid Policy Shifts

Staff economists at the December meeting described the economic outlook as particularly uncertain, citing the incoming Trump administration’s proposed changes to trade, fiscal, immigration, and regulatory policies. Various scenarios were presented to policymakers, reflecting the unpredictable impact of these policy shifts on the economy.

One key concern is the inflationary impact of Trump’s proposed tariffs. Staff projections suggest inflation in 2025 will remain similar to 2024 levels, with tariffs contributing to sustained price increases. Goldman Sachs economists estimated that these tariffs could raise inflation by nearly half a percentage point later this year.

Inflation Concerns Influence Policy

Fed Chair Jerome Powell acknowledged that inflation’s persistence influenced the decision-making process. At a news conference on Dec. 18, he described the rate cut decision as a “close call.” Recent data shows inflation at 2.4% in November, exceeding the Fed’s 2% target, while core inflation (excluding food and energy) reached 2.8%.

Not all officials shared the same outlook. Fed Governor Christopher Waller expressed support for continued rate reductions, predicting inflation would gradually decline to the Fed’s target. He also downplayed concerns over tariffs exacerbating inflation. However, other officials remain cautious, focusing on the potential economic ripple effects of widespread tariffs and other proposed policies.

 As policymakers grapple with the dual challenge of inflation and economic uncertainty, the Federal Reserve’s next steps will be closely watched by economists and financial markets alike.