:max_bytes(150000):strip_icc()/GettyImages-2235766892-4379b448fae24b41a375da7ccc897662.jpg "What Will Prompt the Fed to Cut Interest Rates Again? FOMC Minutes Offer Key Insights.")
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Key Takeaways
- While Fed policy committee members remained divided over whether to cut interest rates, minutes from their December meeting showed that most would support rate cuts if inflation continues to decline.
- Fed officials saw fewer risks that tariffs would drive up inflation, and more saw risks that the labor market could begin to deteriorate if rates remained too high.
- But a rate cut in January remains far from certain, as several members said that the central bank must make sure inflation doesn’t move higher before moving to cut again.
The Federal Reserve could move forward on more interest rate cuts if inflation continues to move lower, though officials remain divided about what recent economic data is telling them, minutes from the Fed policy committee’s most recent meeting showed.
“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,” according to the minutes, released Tuesday, of the Federal Open Market Committee’s (FOMC) meeting on Dec. 9-10.
Why This is Important
The federal funds rate influences borrowing costs on a range of consumer and business loans. Setting rates at the right level can encourage economic growth and boost the labor market without making products and services too expensive for consumers.
The Federal Reserve cut interest rates for a third straight time during its December meeting as FOMC members saw more risk of a weakening labor market, even as inflation has remained above the Fed’s target of 2%. But it wasn’t a unanimous decision. Fed Governor Stephen Miran, a recent appointee of President Donald Trump, voted for a steeper rate cut at the meeting, while two other members voted to keep rates steady amid persistent inflationary pressures.
The minutes showed that many FOMC members were seeing fewer risks that tariffs would drive inflation consistently higher. The observation came before the latest Consumer Price Index (CPI) report showed that inflation came in at 2.7% in November, down from the 3% annual increase in prices that the prior report showed.
While FOMC members see more rate cuts on the horizon in 2026, it’s far from certain that the fed funds rate will be cut at the January meeting. If inflation doesn’t significantly move lower and the Fed continues to cut, some members worry that the Fed’s commitment to its 2% inflation target will be questioned.
“Some participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for some time after a lowering of the range at this meeting,” the minutes showed.
The minutes showed that many FOMC members believed it was important to lower interest rates to counter the emerging weakness in the labor market. Indeed, the jobs report released days after the meeting showed that unemployment had risen to 4.6%, its highest levels since 2021.
“Most participants noted that a move toward a more neutral policy stance would help forestall the possibility of a major deterioration in labor market conditions,” the minutes said.
