The latest minutes released by the Federal Reserve once again expose the significant divisions among decision-makers regarding the future direction of interest rates. In addition to the supporters of rate cuts and those taking a wait-and-see approach, the minutes also explicitly mention for the first time that some participants discussed the possibility of rate hikes. This reflects a shift in the Fed's policy focus back to inflation risks, rather than the slowdown in employment, as inflation continues to remain above the Fed's target of 2% and the economy shows resilience.
The minutes released on Wednesday, Eastern Time on the 18th, indicate that at the monetary policy committee FOMC meeting at the end of January, &#34;some&#34; participants expressed support for adopting a &#34;two-way&#34; statement in the forward guidance on interest rates, to &#34;reflect that if inflation remains above target levels, it may be appropriate&#34; to raise rates. This wording marks a noticeable increase in concerns among some officials regarding the stickiness of inflation.
Other &#34;some&#34; officials believed that if inflation declines as expected, it may be appropriate to further cut rates. However, the majority of participants warned that the process of inflation returning to 2% could be &#34;slower and more uneven&#34; than generally anticipated. The vast majority of participants assessed that the downside risks to employment have eased somewhat in recent months, but the risks of more persistent inflation still exist.
The term &#34;some&#34; appears multiple times in this minutes, highlighting the degree of divergence in views within the FOMC. After the release of the minutes from last year's November meeting, which exposed divisions within the Federal Reserve, media and journalist Nick Timiraos, known as the &#34;new Fed whisperer,&#34; pointed out that in the Fed's wording, &#34;many&#34; represents a number lower than &#34;most,&#34; but higher than &#34;some.&#34;
<h2>Dual Possibilities for Interest Rate Path</h2>
As expected by the market, the Federal Reserve decided to pause rate cuts during the meeting on January 27-28, with two of the 12 FOMC voting members opposing this decision. The two dissenters—Governor Waller, who was then a candidate for Fed Chair, and another governor appointed by President Trump, Mian—supported continuing to cut rates by 25 basis points.
The minutes released on Wednesday show that during the discussion of the monetary policy outlook at the January meeting, some Fed decision-makers were cautious about further rate cuts, at least in the short term. The minutes state:
<blockquote>
&#34;Some participants warned that further easing of monetary policy in the face of high inflation data could be misinterpreted as a weakening of the decision-makers' commitment to the 2% inflation target.&#34;
</blockquote>
This stance contrasts with the views of another group of officials. The minutes indicate that some officials believe that if inflation declines as expected, the possibility of further rate cuts still exists. However, most officials stated that the progress on inflation may be slower than generally predicted.
All participants agreed that monetary policy would not follow a predetermined path but would be determined by various latest data, changing economic outlooks, and risk balances
<h2>Inflation Concerns Remain a Core Focus</h2>
Participants observed that overall inflation in the United States has significantly retreated from the highs of 2022, but remains slightly elevated relative to the Federal Reserve's long-term target of 2%. They generally pointed out that these elevated figures largely reflect core goods inflation, which appears to be driven by the impact of tariff increases.
Regarding the inflation outlook, participants expect inflation to trend down towards 2%, but the pace and timing of the decline remain uncertain. Participants widely anticipate that the impact of tariffs on core goods prices may begin to wane this year. Several participants mentioned that the continued slowdown in housing services inflation could exert downward pressure on overall inflation.
Several participants also expect that productivity gains related to technological or regulatory developments will put downward pressure on inflation. In line with this view, a few attendees referenced reports from business contacts indicating that companies are engaging in more automated operations and taking other measures to help offset rising costs, which will reduce the need to pass cost increases onto consumer prices or cut profits.
Most participants warned that progress towards the 2% inflation target may be slower and more uneven than generally expected, and they believe that the risk of inflation remaining persistently above target should not be overlooked. Some of these participants cited reports from business contacts who expect to raise prices this year in response to cost pressures, including those related to tariffs.
Several participants also suggested that ongoing demand pressures could keep inflation elevated.
<h2>Labor Market Shows Signs of Stability</h2>
Regarding the labor market, participants noted that the unemployment rate in the United States has remained relatively stable in recent months, while job growth remains low. Most participants pointed out that recent data readings on unemployment rates, layoffs, and job vacancies suggest that labor market conditions may be stabilizing after experiencing a gradual cooling period.
Almost all participants observed that while layoff levels remain low, hiring also remains subdued. In line with this observation, several participants noted that their business contacts continue to exercise caution in hiring decisions, reflecting uncertainty about the economic outlook and the impact of artificial intelligence and other automation technologies on the labor market.
The vast majority of participants judged that labor market conditions have shown some signs of stabilization, and the downside risks to the labor market have diminished. However, some participants pointed out that while the labor market shows signs of stabilization, indicators such as job availability surveys and the proportion of individuals working part-time for economic reasons still suggest that the market is softening. Additionally, most participants noted that downside risks to the labor market still exist.
<h2>Economic Growth Remains Robust</h2>
Participants observed that economic activity appears to be expanding at a robust pace.
Participants generally pointed out that consumer spending has remained resilient, primarily due to the growth in household wealth. Business fixed investment remains strong, particularly in the technology sector.
Participants widely expect that the pace of economic growth will remain robust through 2026, although uncertainty about the growth outlook remains high. Most participants anticipate that growth will be supported by continued favorable financial conditions, fiscal policy, or regulatory policy changes. Furthermore, given the strong pace of investment related to artificial intelligence and relatively high productivity growth in recent years, several participants judged that sustained productivity improvements will support economic growth
Since the Federal Reserve's meeting at the end of January, data released has shown that the U.S. economy is growing at an accelerated pace, inflation is slowing, and the labor market is stabilizing. Influenced by lower energy costs, the CPI growth in January was below market expectations. The non-farm payrolls added 130,000 jobs in January, marking the largest increase in over a year, and the unemployment rate unexpectedly dropped to 4.3%, indicating continued stabilization in the labor market at the beginning of the year.
Market trading data shows that investors have lowered their expectations for the timing of the Fed's next interest rate cut, but futures contracts pricing suggests that traders still expect a possible rate cut before June. Since the January meeting, several Fed policymakers have indicated that the overall stable U.S. economy provides them with the space to remain patient when considering further adjustments to interest rates. Trump and his administration officials continue to call for an immediate rate cut.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/00faf283-b2e9-4443-9b26-6ca0eaa52162.jpeg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/00faf283-b2e9-4443-9b26-6ca0eaa52162.jpeg"/>
After the strong growth in non-farm employment reported last week, the market has ruled out the possibility of a rate cut in March, and the expectations for rate cuts throughout the year remain dovish compared to the end of January meeting.
<h2>Financial Stability Risks Related to AI and Private Credit Draw Attention</h2>
In discussions about financial stability, several participants mentioned overvalued assets and credit spreads at historical lows. Some participants discussed the vulnerabilities that recent developments in the artificial intelligence (AI) sector may bring, including high stock market valuations, market capitalization and activity highly concentrated in a few companies, and increased debt financing.
Several participants emphasized the vulnerabilities associated with the private credit sector and its provision of credit to higher-risk borrowers, including the associated risks with other types of non-bank financial institutions (such as insurance companies) and banks' exposure to this sector.
Several participants commented on the risks associated with hedge funds, including their expanding footprint in the treasury and equity markets, rising leverage, and the ongoing expansion of relative value trading potentially making the treasury market more susceptible to shocks

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Some participants support the use of "two-way" language in the interest rate guidance, reflecting that if inflation remains above 2%, it may be appropriate to raise interest rates; others believe that if inflation declines as expected, it may be appropriate to further lower interest rates; most warn that the process of declining inflation may be slower and more uneven than expected; the vast majority believe that the risk of employment decline has eased in recent months, but the risk of more persistent inflation still exists; some discuss vulnerabilities related to high stock market valuations and the concentration of market capitalization in a few companies due to AI, while others emphasize vulnerabilities in the private credit sector

- The latest FOMC meeting minutes reveal significant division among Federal Reserve officials regarding future interest rate directions, with discussions about both rate cuts and hikes.  
- Concerns over persistent inflation exceeding the 2% target have shifted the Fed's focus back to inflation risks rather than employment issues.  
- Observations indicate a stable labor market, robust consumer spending, and financial stability challenges linked to high asset valuations and private credit risks, despite economic growth remaining resilient.

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The Federal Reserve meeting minutes reveal significant divisions: some officials support further rate cuts, while others hint at possible rate hikes