By Steven K. Beckner
(MaceNews) – Few Federal Reserve officials have completely foreclosed the possibility of resuming interest rate reductions at some point, but for the foreseeable future, the U.S. central bank appears to be firmly on hold.
The Federal Open Market Committee may well get around to cutting the federal funds rate at least once this year, but for the time being all indications are that the Fed’s rate-setting body is extremely unlikely to cut its policy rate at its March 17-18 meeting.
Even an easing move at the April 28-29 – Jerome Powell’s last as Fed chairman — seems doubtful, as things now stand.
That’s what recent comments from Fed officials, as well as minutes of the January 27-28 FOMC meeting indicate. As reflected in the minutes, the overwhelming majority want to see confirmation that inflation is headed down to their 2% target before considering more rate cuts, barring unexpected labor market weakness.
Even past advocates of continued easing seem to have been soft pedaling their advocacy of late. For example, Fed Vice Chair for Supervision Michelle Bowman, who said on Jan. 30 that she “could have” supported another 25 basis point rate cut two days earlier, has since remained silent on monetary policy at multiple public appearances, instead confining herself to her banking supervision bailiwick.
Other officials who have spoken in recent days have been noncommittal, if not hostile, to additional rate cuts.
Minneapolis Federal Reserve Bank President Neel Kashkari, a voting member of the FOMC this year, made clear he’s in no hurry to cut rates again any time soon, saying the funds rate is already “pretty close to neutral” and suggesting it will take time to assess where inflation and employment are heading.
The usually reticent Fed Governor Michael Barr was outspoken Tuesday in favor of indefinitely delaying further rate cuts. After saying labor markets are “stabilizing” and warning of a “significant” risk of “persistent inflation about our 2% target,” he said the Fed should “remain vigilant” and “take the time necessary” to make sure inflation is abating before considering additional rate cuts.
The funds rate may need to stay where it is “for some time,” Barr declared.
San Francisco Federal Reserve Bank President Mary Daly, who will be voting on the FOMC in 2027, also focused on inflation control Tuesday, although she allowed for the possibility in the longer run that AI-related productivity gains could help control wage-price pressures.
Chicago Fed President Austan Goolsbee, who will join Daly in the voting ranks next year, said Tuesday that “several more” rate cuts are possible this year, but only if the Fed sees evidence that inflation is on its way to the its 2% target.
After cutting the funds rate by 75 basis points in the last four months of 2025, and 175 basis points since September 2024, the FOMC left that policy rate in a target range of 3.5% to 3.75% on on Jan. 28. Governors Stephen Miran and Christopher Waller dissented in favor of another 25 basis point cut.
In their last Summary of Economic Projections (SEP), published Dec. 10, the 19 FOMC participants had anticipated a single 25 basis point rate cut in 2026, but some officials want more rate cuts, while others want none.
The Dec. 10 rate cut pause left the median funds rate of 3.6% 60 basis points above the Committee’s 3.0% estimate of the “longer run” or “neutral” rate, and three Fed governors (Waller, Miran and Bowman) have argued for more rate cuts on the grounds that the current funds rate target remains too restrictive relative to that putative “neutral” rate, but that is a matter of considerable dispute..
Some officials question whether the funds rate is above neutral at all. Others have acknowledged that the funds rate remains above “neutral,” but are not willing to “normalize” the policy rate closer to neutral until they become convinced inflation is headed down to 2%.
Minutes of the Jan. 27-28 FOMC meeting reflect ongoing divisions among Fed governors and presidents. Although only two members (Miran and Waller) voted against leaving the funds rate unchanged, there were others who were sympathetic with the desire for further rate cuts eventually. But there were also who felt strongly the other way.
“Those who favored maintaining the target range generally viewed that, after the 75 basis point lowering of the target range last year, the current stance of monetary policy was within the range of estimates of the neutral level,” the minutes report. “They commented that maintaining the current target range of the federal funds rate at this meeting would leave policymakers well positioned to determine the extent and timing of additional adjustments to the policy rate…”
The minutes say “those who preferred to lower the target range at this meeting expressed concerns that the current stance of the policy rate was still meaningfully restrictive and viewed downside risks to the labor market as a more prominent policy concern than the risk of persistently elevated inflation.”
Looking down the road, the minutes divide officials into four camps:
First, “several participants commented that further downward adjustments to the target range for the federal funds rate would likely be appropriate if inflation were to decline in line with their expectations.”
Second, “some participants commented that it would likely be appropriate to hold the policy rate steady for some time as the Committee carefully assesses incoming data…”
Third, a subset of that second group “judged that additional policy easing may not be warranted until there was clear indication that the progress of disinflation was firmly back on track.”
Finally, although Powell said a rate hike was no one’s “base case,” the minutes say there were those who were open to that possibility: “Several participants indicated that they would have supported a two-sided description of the Committee’s future interest rate decisions, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.”
Regarding “risk-management” considerations, the minutes say “the vast majority of participants judged that downside risks to employment had moderated in recent months while the risk of more persistent inflation remained, and some commented that those risks had come into better balance.”
But here too, opinions varied, with some arguing more strongly against a resumption of rate cuts.
“Several participants cautioned that easing policy further in the context of elevated inflation readings could be misinterpreted as implying diminished policymaker commitment to the 2% inflation objective, perhaps making higher inflation more entrenched,” say the minutes.
“By contrast, a few participants highlighted the risk that labor market conditions could deteriorate significantly while expressing confidence that inflation would continue to decline,” they continue. “These participants cautioned that keeping policy overly restrictive could risk further deterioration in the labor market.”
The only apparent consensus was that “participants judged that a careful balancing of risks was required to achieve the Committee’s dual-mandate objectives.”
The minutes reveal some degree of optimism that AI-related productivity increases will aid in the battle to curb inflation, but few officials were prepared to take that outcome for granted.
Viewpoints do not seem to have changed greatly since the late January meeting, despite two major data releases – one showing surprising strength in January job gains, the other showing moderation in consumer price inflation.
Kashkari sounded very much in a wait-and-see mode Thursday in a Midwest Economic Summit “fireside chat.”
“We want to get inflation to 2% (and) have as many Americans working as possible,” he said, but suggested the Fed has more work to do to achieve those goals.
Referring to the Fed’s dual mandate of “maximum employment“ and “price stability” (defined as 2% inflation), Kashkari said, “right now we’re close on both.”
After 175 basis points of rate reductions, “we’re pretty close to neutral where monetary policy is,” he said, adding that “ultimately we’ll have to see where inflation goes. whether it will comes all the way down to 2%” and whether unemployment goes up or down from the current 4.3%.
Despite the relatively firm tone of labor markets and the “signs of stabilization” referenced in the Jan. 28 FOMC statement, Kashkari expressed some misgivings. Business contacts in his ninth district have told him they are “fully staffed,” and that “makes me cautious that maybe the labor market is not as sound as some statistics would imply.”
But he rejected the claims of Miran and others that the current funds rate setting is overly restrictive relative to “neutral.” Noting that the 10-year Treasury yield has stayed around 4% even as the FOMC slashed rates over the past year and a half, he said “that tells me the neutral rate is probably higher than before,” as demand and supply for capital to build data centers and other projects equilibrate.
Barr, who does not frequently comment on monetary policy, went out of his way to do so Tuesday in a speech otherwise devoted to artificial intelligence, putting himself squarely in the stand pat camp by suggesting that employment does not need more help from monetary policy at a time when inflation is still too high.
Citing the January employment report, with its unexpectedly large 130,000 gain in non-farm payrolls and one-tenth dip in unemployment, he said it “provided further evidence that while the labor market slowed through last summer, it is now stabilizing. This stabilization is occurring with an unemployment rate that is broadly consistent with what many estimate is its long-run level, when the economy is in balance…..”
“With very low levels of job creation and also a low firing rate, there seems to be a tentative balance in labor supply and demand,” Barr went on, although he conceded, “it is a delicate balance, and that means that the labor market could be especially vulnerable to negative shocks.”
He expressed greater concern on the inflation side of the dual mandate, noting that ‘inflation based on personal consumption expenditures remains elevated at 3%, about where it was a year ago.”
Barr said “it is reasonable to forecast that tariff effects on inflation will begin to abate later this year, but there are many reasons to be concerned that inflation will remain elevated. I see the risk of persistent inflation above our 2% target as significant, which means we need to remain vigilant.”
He concluded that “the prudent course for monetary policy right now is to take the time necessary to assess conditions as they evolve.”
“I would like to see evidence that goods price inflation is sustainably retreating before considering reducing the policy rate further, provided labor market conditions remain stable,” Barr continued. “Based on current conditions and the data in hand, it will likely be appropriate to hold rates steady for some time as we assess incoming data, the evolving outlook, and the balance of risks.”
While Miran and others have argued that AI-related productivity gains should help curb inflation and allow the FOMC to cut rates, Barr made an opposing argument.
Citing the increased demand for capital to implement AI, he said, “All of this would imply a higher setting for the policy rate when the economy is at equilibrium, or what monetary economists call r*. Indeed, last year I raised my long-term estimate of r* modestly because of higher productivity. Moreover, in the short term, investment in AI could be inflationary.”
Goolsbee was also inclined to wait indefinitely before cutting rates again Monday.
“If we can show that we’re on path to 2% inflation, I still think there’s several more rate cuts that can happen in 2026,” he said on CNBC. But he added, “we’ve got to see it.”
Last Friday, the Labor Department reported that its Consumer Price Index increased 0.2% in January from a month earlier and 2.4% from a year earlier, down from 2.7% in December. The core CPI was up 2.5%.
But few officials are ready to take that report as conclusive evidence that inflation is headed down to 2%, leaving most wanting more proof.