Fed fears Trump policies could hinder effort to cut US inflation, minutes show

Federal Reserve officials see a rising risk that inflation may remain sticky in the US as policymakers begin wrestling with the impact of policies from the incoming Trump administration, according to the minutes of the US central bank’s latest meeting.

While officials believe inflation will continue to move toward 2%, the Fed’s target rate for inflation, they noted that “recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated”.

“Several observed that the disinflationary process may have stalled temporarily or noted the risk that it could,” the minutes released on Wednesday noted.

The minutes described the December rate cut by the policy-setting Federal Open Market Committee as “finely balanced”, with some participants noting the “merits” of not reducing borrowing costs in light of what some see as stalled progress in lowering inflation.

December’s Fed decision sent stock markets sharply lower as investors weighed the consequences of a slow down in the central bank’s rate cutting policies.

The minutes underlined the Fed’s belief that it may have to slow the rate of cuts. Given the uncertainty ahead “participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the minutes said. “Most participants remarked that … the committee could take a careful approach in considering” further cuts.

The minutes showed policymakers facing a suddenly tangled set of new influences on an economy that starts the year with relatively low unemployment, strong growth, and inflation that remains above the Fed’s 2% target but is expected to decline.

Fed staff “highlighted the difficulty” of gaming out what lay ahead from an administration that has promised to deport undocumented immigrants, tighten the borders, and raise taxes on imported goods – but said it could lead to slower growth and higher unemployment.

“After incorporating the recent data and preliminary placeholder assumptions about potential policy changes, real GDP growth was projected to be slightly lower than in the previous baseline forecast, and the unemployment rate was expected to be a bit higher,” the minutes said of staff assessments of the policies that Donald Trump’s return to power on 20 January may usher in.

Along with higher tariffs, volatile trade relations, and tough immigration rules, Trump has also pledged looser regulations on business and tax cuts.

Policymakers say it will take time to determine the net impact of those policies.

Reuters contributed reporting