Hawkish Fed Minutes: Inflation, Tariffs and Policy Uncertainty

Fed's January Meeting Minutes Released: A Hawkish Tone Overall

Fed officials emphasized that if the U.S. economy remains near full employment, they want to see further inflation declines before cutting rates. Many noted that if economic strength persists and inflation remains elevated, the Fed may keep rates at restrictive levels. However, some officials suggested rate cuts would be appropriate if the labor market weakens, economic growth slows, or inflation falls to the 2% target faster than expected.

Notably, the minutes revealed discussions about uncertainty stemming from Trump's policies. His push for tariffs and stricter immigration enforcement could impact inflation, the labor market, and economic growth.

Inflation Risks Persist

Participants generally acknowledged upside risks to inflation. Potential shifts in trade and immigration policy, as well as geopolitical disruptions, could strain supply chains and push household expenses higher. Some officials also noted that seasonal factors in the January CPI data complicate inflation assessment, dismissing the notion that inflationary pressures are merely "transitory."

Several Fed regional contacts reported that businesses are considering passing potential tariff costs onto consumers, which could lead to renewed price increases. Inflation expectation indicators have also risen.

Economic Outlook and Policy Considerations

Officials remained broadly optimistic about the U.S. economic outlook, partly due to expectations of regulatory easing and tax cuts.

Additionally, some participants raised concerns over the ongoing U.S. debt ceiling debate. They suggested that pausing or slowing the Fed's balance sheet reduction (QT) might be appropriate until the debt ceiling issue is resolved.

Market Reaction

The minutes offered little new information, reaffirming that the Fed's future rate path depends on inflation trends. Following the release, rate futures markets priced in a single Fed rate cut in July 2025. U.S. stock indices closed slightly higher overnight.

Oxford Economics Chief U.S. Economist Ryan Sweet commented:"The minutes support our revised baseline forecast: the Fed will remain cautious and likely cut rates just once in December. Some officials hinted that there may not be much room for further easing."