Fed officials split on where interest rates should go, minutes say

• Some officials want to pause rate cuts indefinitely until disinflation 'firmly back on track,' while others see room for cuts if inflation cooperates; a few even suggested rate hikes could be appropriate if inflation stays elevated
• Two new voting members, Lorie Logan (Dallas) and Beth Hammack (Cleveland), publicly favor holding rates indefinitely due to continuing inflation concerns, while Governors Waller and Miran voted against the hold, preferring another quarter-point cut
• Markets expect the next rate cut in June with another in September or October; inflation remains stuck around 3% on the Fed's preferred PCE measure, above the 2% target, though core CPI recently hit its lowest level in nearly five years

Summary: Fed Officials Divided on Interest Rate Path

Federal Reserve officials showed significant disagreement at their January 27-28 meeting regarding future monetary policy direction, according to minutes released Wednesday. While the decision to maintain the benchmark rate at 3.5%-3.75% was largely approved, deep divisions emerged over whether to prioritize fighting inflation or supporting the labor market.

Key Divisions:

Several participants indicated further rate cuts could be appropriate if inflation declines as expected. However, others argued for holding rates steady "for some time" until disinflation progress is clearly back on track. Some officials even suggested rate hikes might be necessary if inflation remains elevated, requesting language reflecting "two-sided" policy options.

Recent Rate History:

The Fed cut rates by 0.75 percentage points total across three consecutive meetings (September, November, December) before pausing in January.

Inflation Outlook:

Participants generally expect inflation to decline throughout the year, though timing remains uncertain. The Fed's preferred PCE metric has hovered around 3%, above the 2% target. Officials noted tariff impacts on prices but expect these effects to diminish over time. "Most participants" cautioned that progress toward 2% inflation may be slower and more uneven than anticipated.

Labor Market:

Recent data shows mixed signals—private sector job growth is slowing, concentrated primarily in healthcare, but unemployment dipped to 4.3% in January with stronger-than-expected payroll growth.

Market Implications:

Futures markets currently price in the next rate cut occurring in June, with another reduction in September or October. The incoming leadership transition—Kevin Warsh potentially replacing Jerome Powell as chair in May—could further shift policy dynamics, as Warsh favors lower rates.