Minutes from the latest Federal Reserve meeting suggest policymakers will take a slower approach to future rate cuts, according to analysts at Goldman Sachs.
President-elect Donald Trump’s plans to impose sweeping tariffs and massive repatriation have fueled uncertainty among Fed staff about the inflation outlook, as reflected in minutes of the central bank’s December meeting.
Policymakers worried that the recent cooling of price increases could be undermined by Trump’s policy changes, adding that the process of lowering inflation to the Fed’s 2% target “may take longer than previously anticipated.”
Meeting participants emphasized “continued progress on inflation but were mindful of upside risks,” Goldman Sachs analysts said.
These concerns, coupled with the Federal Open Market Committee (FOMC) cutting interest rates by one percentage point in 2024, convinced some members to opt for a “cautious” approach to further cuts this year, according to the minutes.
After the report was released, sentiment was buoyed that the Fed is expected to keep borrowing costs unchanged over the next few meetings, with the first cut now not expected until May.
Markets are now looking ahead to the monthly US jobs report on Friday, which could further influence Fed staff views. On Wednesday, private sector employment data for December showed a slowdown, although the number of Americans filing weekly for unemployment benefits fell.
Meanwhile, in a note to clients, Goldman Sachs analysts noted that the minutes did not include any discussion of the Fed’s moves to reduce its balance sheet. Some observers have suggested that the central bank may end efforts to reduce holdings through a process known as quantitative tightening (QT) in 2025.
“Given the lack of concrete discussions by Fed policymakers, the ongoing assessment that reserves are still ample, and the rapid easing of funding pressures at the start of the year, we are postponing the expected date for a second QT cut to the next meeting,” Goldman Sachs analysts wrote.
“We now expect Treasury disposals to run until the end of March (versus January previously) but maintain our view that mortgage-backed securities (MBS) disposals will end by the end of June.”
