Fed Officials Signal Gradual Interest Rate Cuts Ahead as Inflation Eases and Labor Market Stays Strong

The officials are now expecting slow interest rate cuts ahead, with growing confidence that inflation is softening and the labor market continues to remain strong, according to minutes of the Fed’s November meeting released on Tuesday. The Fed continues to see that inflation is still above the bank’s 2% target; yet the bank continues to be optimistic about how progress will go forward, which might be interpreted as a possible cause for further rate reductions at a slow pace.

The minutes detail that FOMC participants were generally content with inflation progress because the data had placed it on a course to hitting the Fed’s objective; still, they cautioned against moving ahead too aggressively. Officials noted, “If the process continued, and the economy also continued to be near the edge of maximum employment,” then it would be warranted to begin to shift over time toward a more balanced policy stance. It would thus mean further cuts in rate, although these rates are unknown in terms of timing and scale.

At the November meeting, the FOMC voted unanimously to lower the benchmark borrowing rate by a quarter percentage point to a target range of 4.5%-4.75%. The market had been expecting another rate cut in December, but that expectation has faded as fears of inflationary pressures from new tariffs under President-elect Donald Trump’s economic plans have increased.

The minutes also pointed out some uncertainties regarding the future path of interest rates. In particular, officials were having difficulty determining the “neutral” interest rate—the level at which monetary policy neither stimulates nor restrains growth. This uncertainty has made Fed officials cautious in their approach, opting for gradual adjustments rather than abrupt changes.

While inflation continues to be above the Fed’s goal, the minutes observed several factors that are exerting downward pressure on price growth. These include a decline in business pricing power, continuing tightness in monetary policy, and well-anchored long-term inflation expectations. Shelter costs, one of the main drivers of inflation, are also seen to slow as rent increases ease up, further supporting the inflation outlook.

Despite recent concerns over the labor market, with October’s nonfarm payrolls rising by just 12,000, officials noted that there was no indication of a rapid deterioration in employment conditions. Layoffs remain low, and the overall labor market remains strong, giving policymakers confidence as they navigate future rate cuts.