Fed dissent grows as some officials weigh return to interest rate hikes amid stubborn inflation

• Several Fed officials supported adding language about potential rate hikes to policy statements if inflation stays above target levels
• PCE inflation reached 2.8% in November 2025, the highest since October 2023, with core PCE also at 2.8%
• Fed Chair Powell noted that core PCE would be 'just a bit above 2%' without the inflationary effects of tariffs imposed on Liberation Day

Summary

Key Development: Growing divisions within the Federal Reserve emerged during its January FOMC meeting, with some officials advocating for potential interest rate hikes if inflation persists above target levels.

Meeting Details: The FOMC voted 10-2 to maintain the federal funds rate at 3.5%-3.75%. Fed Governors Christopher Waller and Stephen Miran dissented, favoring rate cuts due to labor market concerns. However, "several participants" supported including language in the announcement about possible future rate increases to combat stubborn inflation.

Inflation Data:

• The Fed's preferred PCE inflation gauge reached 2.8% in November 2025, matching September's level—the highest since October 2023
• Core PCE (excluding food and energy) also stood at 2.8% in November
• Both metrics remain above the Fed's 2% long-run target
• PCE had reached a 2025 low of 2.2% in April, while core PCE hit 2.6% that month

Market Implications: The minutes reveal a three-way split among policymakers: some favor holding rates steady, others support potential hikes if inflation persists, while a minority advocated for cuts. This internal disagreement signals heightened uncertainty about the Fed's policy trajectory.

Tariff Impact: Fed Chair Jerome Powell acknowledged that tariffs implemented on "Liberation Day" in early April contributed to elevated inflation readings. Powell indicated core PCE would be running "just a bit above 2%" without tariff effects on goods prices.

The divergent views suggest the Fed faces a difficult balancing act between controlling inflation and supporting the labor market, with future policy decisions highly data-dependent.