Fed Minutes Show Division as Rate Cuts Remain on the Table

The Federal Reserve is still leaning toward cutting interest rates again this year, but the readout of its latest meeting shows all the reasons why it may not.

The minutes of January’s meeting, released on Wednesday, displayed the clear division at the Fed over where it should go next after cutting rates three times in 2025.

Most still think “further downward adjustments” are likely still necessary if inflation keeps decelerating, the minutes show. That’s in line with markets’ current expectations of a couple of rate cuts later this year. 

But with inflation still a bit above the Fed’s 2% target, some central bank officials appeared more reluctant. They argued that cutting rates more than necessary may push up prices again, undercutting their efforts to quell the inflation that spiked in 2022.

“Several participants cautioned that easing policy further in the context of elevated inflation readings could be misinterpreted as implying diminished policymaker commitment to the 2% inflation objective, perhaps making higher inflation more entrenched,” the FOMC minutes said.

Indeed, several of them even thought the Fed’s communications should remove the current bias toward cutting rates again, the minutes show.

While the Fed kept rates steady at 3.5% to 3.75% in January, its statement said officials would consider the “extent and timing of additional adjustments” —a signal that rate cuts were more likely than not. The minutes released Wednesday showed several “would have supported a two-sided description,” reflecting that rate hikes are just as possible if inflation remains above 2%.

Few analysts see the Fed hiking rates this year, but the minutes nonetheless underline Fed officials’ focus on fully bringing inflation back to 2%. The most recent reading, from December, showed annual inflation was still slightly above 2.5%.

“We must remain focused on our headline inflation objective; otherwise, I believe there is a real risk that inflation will get stuck closer to 3% than 2% in the long run,” Kansas City Fed President Jeffrey Schmid said last week.

Employment Risks Moderating

The Fed’s rate cuts last year were aimed at supporting a job market that was showing signs of weakening. 

But most Fed officials agreed those risks had “moderated in recent months while the risk of more persistent inflation remained,” the minutes said. That assessment came before January’s stronger-than-expected jobs report, which showed U.S. employers added 130,000 jobs and the unemployment rate fell to 4.3%.

A few Fed officials appeared more worried about the job market backtracking—and appeared more confident inflation would keep climbing back down. They cautioned that keeping rates too high could make job losses more likely.

“These participants cautioned that keeping policy overly restrictive could risk further deterioration in the labor market,” the minutes said. 

Fed Governors Stephen Miran and Christopher Waller both voted against January’s decision to keep rates unchanged. In his dissent statement, Waller said job gains in 2025 were “very weak” and that conditions don’t “remotely look like a healthy labor market.” 

With inflation “just slightly above 2% and a weak labor market,” the Fed has room to cut rates a bit further, he argued.

“Employers are reluctant to fire workers, but also very reluctant to hire,” Waller said.

Some analysts agree with that assessment.

“We expect employment growth to drop back to its weak earlier pace over the next few months, putting renewed upward pressure on the unemployment rate,” Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, wrote on Wednesday.

Inflation “remains the main barrier to additional cuts,” Allen wrote, but those worries should ease in the months ahead as tariff-driven price bumps fade. He sees the Fed cutting rates three times again this year, in June, July and September—all of which would presumably occur under the new Fed chair’s tenure.

The Fed is “firmly on hold…for now,” he wrote.