Fed officials cautious about interest rate cuts as fears about inflation persist

At their meeting last month, Federal Reserve officials cited mounting concerns that inflation might escalate—a major factor for keeping interest rates steady.

The minutes from the January 28-29 gathering, unveiled this week, revealed discussions about possible inflationary pressures from President Donald Trump’s proposed tariffs, the potential mass deportation of migrants, and robust consumer spending.

The conversation among the Fed’s 19 rate-setting members suggested a cautious stance, with the sentiment being “they would want to see further progress on inflation before making” additional rate adjustments. In this vein, they left the benchmark rate at 4.3%, opting not to lower it following a decrease from 5.3% late last year.

This decision by the Fed suggests that the cost of borrowing for consumers—covering home loans, car financing, and credit cards—is unlikely to fall in the near future.

This cautious outlook was bolstered by recent economic data: just last week, figures indicating that inflation may be worsening were disclosed, leading many economists to predict scarce—if any—rate cuts this year. According to the Labor Department, consumer prices jumped by 3% in January from the previous year, a sharp increase from the three-and-a-half-year low of 2.4% recorded last September.

However, the Fed pays closer attention to another inflation gauge, which points to a figure nearer 2.5%.

Amid these deliberations, the minutes also emphasized a “high degree of uncertainty” in the economic landscape, advocating that the Fed should “take a careful approach” when considering any modifications to its pivotal interest rate.

Last month, all members of the Federal Reserve unanimously agreed to keep its key interest rate steady, as revealed by the minutes. This unity is noteworthy given the recent divide among officials, with some pushing for further rate cuts and others concerned about persistent inflation.

A burning question, especially on Wall Street, is the duration of the Fed’s hiatus on rate reductions. Investors are betting that the central bank will hold off on another cut until July, based on futures prices, and don’t see a second reduction happening before 2026.

Many Fed officials are also keen to observe the economic impact of President Trump’s proposed tariffs and immigration policies. While most economists predict that the tariffs will lead to higher inflation, there are arguments that Trump’s pledge to cut regulations could eventually bring down consumer prices.

On Monday, Fed Governor Christopher Waller, during a speech in Australia, expressed his expectation for rates to decrease within the year, although he currently backs a pause.

Waller mentioned that if last month’s inflation rise proves to be temporary, similar to what happened in January 2024, “rate cuts would be appropriate at some point this year.”

He also downplayed the potential impact of new tariffs on inflation, suggesting any price hikes would likely be short-lived. Therefore, Waller believes the Fed shouldn’t alter its policies solely due to tariffs.

“I haven’t altered my outlook based on what has been implemented to date,” he stated, alluding to the tariffs unveiled by Trump.