The Federal Reserve remains focused on a more accommodating monetary policy as it prepares to open 2026, a crucial year for the US central bank, which will also have to manage an important change of leadership starting from mid-year, as pressure for greater support for economic growth intensifies. The confirmation came from the publication of the minutes of the last monetary policy meeting on 9-10 December, which confirm the possibility of two more rate cuts.
Majority in favor of further rate cuts
Minutes from the December meeting confirmed what most officials considered further cuts are appropriate of interest rates, if inflation continues to fall, while only a part of the board deemed it necessary to maintain the unchanged policy “for some time” and a sole member in favor of a more decisive cut.
Differences remain about the future
At the last meeting, the decision to reduce rates for the third time in a row was accompanied by wide divergences, with three dissents among members of the FOMC, the monetary policy committee, and projections that highlight a front against the reduction. The minutes confirm a split between those who fear a worsening of the labor market and those, on the contrary, see the risk of more entrenched inflation.
The decision of reduce rates by 25 basis points to 3.50-3.85% was taken by majority. President Jerome Powell, Vice President John Williams, and bankers Michael Barr voted in favor; Michelle Bowman; Susan Collins; Lisa Cook; Philip Jefferson; Alberto Musalem; and Christopher Waller. They have voted against this action Stephen Miranwho would have preferred to lower the target range by half a percentage point, Austan Goolsbee e Jeffrey Schmidwho would have preferred not to change the target range at all.
Uncertainty dominates the scene
The absence of complete data due to the shutdown and mixed indicators, rising unemployment, but GDP growth at the fastest pace in two years, have further fueled uncertainty about the next moves of the Fed, while the markets price at least two cuts next year.
In their discussions, FOMC members agreed that available indicators suggested a moderate expansion of economic activity and that the employment growth had immediately a slowdown this year and the unemployment rate had increased slightly in September. Members noted that the latest indicators were consistent with these developments and that inflation had increased since the beginning of the year and remained at quite high levels. For this reason, the FOMC remains alert to risks to both objectives of its dual mandate and notes that downside risks to employment have increased in recent months.
The new economic perspectives
Compared to the forecasts developed for the October meeting, one is expected slightly faster real GDP growth until 2028mainly reflecting stronger financial market support and slightly stronger potential output growth. After 2025, GDP growth is expected to remain above potential through 2028 as the dampening effect of tariffs fades and fiscal policy and financial market conditions continue to support spending. Consequently, it is expected that the unemployment rate decreases after this year and reach a level slightly lower than the rate estimate for 2027.
Inflation forecasts developed by the staff for 2025 and 2026 are slightly lower, overall, compared to those developed for the October meeting, but similar for 2027 and 2028. Tariff increases are expected to continue to put upward pressure on inflation this year and next. Thereafter, inflation is expected to return to its previous disinflationary trend and reach 2% in 2028.
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