Fed minutes show caution on rate cuts amid inflation, AI-driven growth

• FOMC staff projects real GDP growth exceeding potential through 2028, with unemployment falling below the natural rate, supported by AI investment and consumer spending
• Some Fed participants favored a two-sided policy approach, leaving open the possibility of rate increases if inflation remains elevated
• The Fed flagged financial stability risks from concentrated AI-related gains, high asset valuations, tight credit spreads, leveraged hedge funds, and vulnerabilities in private credit markets

Federal Reserve Signals Caution on Rate Cuts Amid Inflation and AI-Driven Growth

Federal Reserve policymakers are signaling reluctance to cut interest rates further until inflation demonstrates clearer progress toward the central bank's 2% target, according to minutes from the January 28, 2026 FOMC meeting.

Key Takeaways

The minutes reveal officials view the labor market as stabilizing with rates near neutral levels, though some participants warned inflation could remain elevated longer than anticipated. Certain Fed members favored maintaining flexibility for potential rate increases if inflation persists.

Growth Outlook

The Fed's economic projections are notably optimistic, with FOMC staff forecasting real GDP growth exceeding potential through 2028 and unemployment falling below the natural rate. Jeffrey Roach, Chief Economist at LPL Financial, noted this combination of above-potential growth with easing inflation is uncommon and "likely reflects a strong assumed boost from productivity and AI-related investment."

Consumer spending, wealth effects, and significant AI-related capital investment are expected to sustain above-trend growth through the forecast period.

Financial Stability Concerns

The minutes highlighted several financial stability risks, including:

• Concentrated AI-related market gains
• Elevated asset valuations
• Tight credit spreads
• Leveraged hedge fund positions
• Vulnerabilities in private credit and tech-heavy investments

These factors could pose risks to overall market stability, according to Fed officials.

Market Implications

The next monetary policy move is widely expected later in 2026, with many analysts projecting the next rate cut could occur as late as June, contingent on inflation trends. This cautious stance suggests the Fed will maintain its data-dependent approach before easing policy further.