Fed Minutes Show Concern Over Trump Policies and Inflation

The Federal Reserve expressed concerns about the potential for President Trump's initial policy proposals to drive up inflation. This concern was discussed at the central bank's January 28-29 meeting, a week after Trump's inauguration, as reported by Reuters, citing the meeting's minutes.

Participants "generally pointed to the upside risks to the inflation outlook," rather than risks to the job market, according to the minutes. Potential changes in trade and immigration policy and geopolitical developments were key points of emphasis, Reuters reports.

"Business contacts in a number of (Fed) districts had indicated that firms would attempt to pass on to consumers higher input costs arising from potential tariffs," the minutes said. The minutes also showed that that some measures of inflation expectations "had increased recently."

Following the minutes' release, Atlanta Fed President Raphael Bostic described the complex issues the Fed is trying to navigate. Bostic said that business leaders had told Fed officials about intentions to raise prices, but it was uncertain how consumers would react. Tariffs may add to costs, while deregulation may offset those pressures, leaving the outlook with greater uncertainty.

Due to the increased uncertainty, Bostic said his "confidence bands, the precision of that estimate ... has reduced somewhat and we'll just have to see how things play out."

The uncertainty surrounding Trump's plans has reinforced their reluctance to reduce rates any further.

Economists expect the Fed to cut interest rates at its December meeting, but the minutes suggest that the economic climate has made the Fed more hesitant to commit to an easing cycle.
The minutes showed that "a few" officials hinted there may not be much more room to cut, given the uncertainty about where the Fed's proper stopping point may be.

The Fed’s last meeting in December already showed that expected slower growth and higher inflation from "placeholder assumptions" about Trump's likely actions, per the minutes, had changed the outlook on the economy. The concerns stem from proposed 25% tariffs on Canada and Mexico, and a lockdown of the U.S.-Mexico border.

The Fed has kept its benchmark interest rate in the current 4.25%-4.50% range, and officials have expressed that they are in no rush to cut rates again until they are more certain inflation will decline to the 2% target.

Finally, the minutes showed "various" policymakers noted that slowing or pausing the Fed’s ongoing shrinking of its balance sheet may be appropriate in light of federal "debt ceiling dynamics."