WASHINGTON: Federal Reserve officials showed a widening split over the next direction for U.S. interest rates, with some prepared to reduce borrowing costs if inflation cools and others wanting to keep rates steady longer, according to minutes released Feb. 18 from the Federal Open Market Committee meeting held Jan. 27 to 28. The committee voted 10 to 2 to maintain the federal funds rate target range at 3.5% to 3.75%.
Most participants backed holding rates at that meeting as economic activity was described as expanding at a solid pace, job gains as low, and the unemployment rate as showing signs of stabilization, while inflation remained somewhat elevated. Minutes said those favoring no change generally viewed policy, after a 75 basis point reduction in the target range last year, as within the range of estimates of a neutral level, leaving the Fed well positioned to judge future adjustments based on incoming data and risks.
Two members, Stephen I. Miran and Christopher J. Waller, voted against the decision and preferred to lower the target range by a quarter percentage point. The minutes said those preferring a cut were concerned the policy rate remained meaningfully restrictive and viewed downside risks to the labor market as a more prominent policy concern than the risk of persistently elevated inflation.
Beyond the dissents, the minutes described three broad views inside the committee. Several participants said further downward adjustments would likely be appropriate if inflation declines in line with their expectations. Some participants said it would likely be appropriate to hold the policy rate steady for some time while assessing the data, and a number of those participants judged additional easing may not be warranted until progress on disinflation is firmly back on track.
Two-way debate over next move
Several participants said they would have supported a more explicitly two-sided description of future interest rate decisions, reflecting the possibility that upward adjustments to the target range could be appropriate if inflation remains at above-target levels. In risk-management discussions, the vast majority judged downside risks to employment had moderated in recent months while the risk of more persistent inflation remained. Some cautioned that easing further with elevated inflation readings could be misinterpreted as diminished commitment to the Fed’s 2% inflation objective.
Participants anticipated inflation would move down toward 2% but said the pace and timing of that decline remained uncertain. The minutes said participants generally expected the effects of tariffs on core goods prices would likely start to diminish this year, while several pointed to ongoing moderation in housing services inflation as a continuing source of downward pressure. Several also expected higher productivity growth tied to technological and regulatory developments to help restrain inflation, citing business reports of increased automation to offset costs.
Labor market and financial stability risks
On labor conditions, participants observed unemployment had held steady in recent months and layoffs remained low, but hiring also remained low. The minutes said several participants reported business contacts were cautious in hiring decisions, reflecting uncertainty about the outlook and the effect of automation technologies. Some participants noted that a further fall in labor demand could push unemployment sharply higher in a low-hiring environment, and cited concerns that job gains concentrated in a few less cyclical sectors could signal vulnerability elsewhere.
The minutes also detailed financial stability discussions that noted high asset valuations and historically low credit spreads. Participants flagged potential vulnerabilities tied to developments in the artificial intelligence sector, including elevated equity valuations, concentration among a small number of firms, and increased debt financing. Several highlighted risks related to private credit and its links to other nonbank institutions, while others pointed to hedge funds’ growing footprint and leverage in Treasury and equity markets.
The committee’s directive reaffirmed maintaining the federal funds rate in a target range of 3.5% to 3.75%, with standing overnight repo operations at 3.75% and overnight reverse repo operations at 3.5%. Consistent with the policy decision, the Board of Governors voted unanimously to maintain the interest rate paid on reserve balances at 3.65% effective Jan. 29 and to keep the primary credit rate at 3.75%. The next FOMC meeting is scheduled for March 17 to 18. – By Content Syndication Services.