The FOMC minutes suggest a wait-and-see viewpoint.
 

Please consider the Minutes of the December 9–10, 2025 Federal Open Market Committee

Participants observed that overall inflation had moved up through September since earlier in the year and remained somewhat above the Committee’s 2 percent longer-run goal, but more recent inflation data produced by the government were unavailable. Most participants remarked that core inflation had been pushed up by higher tariffs that boosted goods prices, even as some participants noted that housing services inflation had moved down closer to levels seen during previous periods when inflation was near 2 percent. A couple of participants commented that inflation in some nonmarket services categories had been affected by special factors, and thus were unlikely to provide a clear signal about broader inflationary pressures. A majority of participants remarked that overall inflation had been above target for some time and had not moved closer to the 2 percent objective over the past year.

Regarding the outlook for inflation, participants generally expected inflation to remain somewhat elevated in the near term before moving gradually to 2 percent. Many participants emphasized that they expected that the effects of tariffs on core goods inflation would wane, although some expressed uncertainty about when these effects would diminish or the extent to which tariffs would ultimately be passed through to final goods prices. Some participants stated that their business contacts had reported persistent input cost pressures unrelated to tariffs, although several of these participants noted that weaker demand limited the ability of some firms to raise prices or that business productivity gains might enable some firms to manage these cost pressures.

With regard to the labor market, participants observed that labor market conditions had continued to soften and that the unemployment rate had edged up in September. Participants reported relying on private-sector and limited government data, as well as information provided by businesses and community contacts, to assess more recent labor market conditions. Most participants remarked that some of the most recent indicators of labor market conditions, including survey-based measures of job availability or reports of planned layoffs, pointed to continued softening. Some participants noted, however, that other indicators, such as weekly initial unemployment insurance claims and measures of job postings, suggested more stability. Several participants commented that lower-income households were especially concerned about their employment prospects. Participants observed that hiring had remained subdued, and some participants pointed to survey-based measures or reports from business contacts that suggested that current hiring plans remained muted. Participants generally viewed the low dynamism in the labor market as reflecting both lower labor demand amid economic uncertainty or efforts by businesses to contain costs and decreased labor supply associated with lower immigration, the aging of the population, or reduced labor force participation.

Participants generally anticipated that the pace of economic growth would pick up in 2026 and that, in the medium term, economic activity would expand at about the same pace as potential output. Many participants expected growth to be supported by fiscal policy, changes in regulatory policy, or somewhat favorable financial market conditions. Nevertheless, participants judged that uncertainty about their forecast of real GDP growth remained high. Moreover, a number of participants noted that structural factors such as technological progress and higher productivity growth, possibly reflecting increasing use of AI, could boost economic growth without generating price pressures and could also damp job creation. These participants remarked that it could be difficult in real time to determine the extent to which economic conditions reflect such structural factors as opposed to cyclical ones.

In their consideration of monetary policy at this meeting, participants noted that inflation had moved up since earlier in the year and remained somewhat elevated. Participants further noted that available indicators suggested that economic activity had been expanding at a moderate pace. They observed that job gains had slowed this year and that the unemployment rate had edged up through September. Participants assessed that more recent indicators were consistent with these developments. In addition, they judged that downside risks to employment had risen in recent months.

Against this backdrop, most participants supported lowering the target range for the federal funds rate at this meeting, while some preferred to keep the target range unchanged. A few of those who supported lowering the policy rate at this meeting indicated that the decision was finely balanced or that they could have supported keeping the target range unchanged.

Those who favored lowering the target range for the federal funds rate generally judged that such a decision was appropriate because downside risks to employment had increased in recent months and upside risks to inflation had diminished since earlier in 2025 or were little changed. Some of these participants emphasized that lowering the target range for the federal funds rate at this meeting was in line with a forward-looking approach to the pursuit of the Committee’s dual-mandate objectives. These participants noted that reducing the policy rate at this meeting would be consistent with the projected decline in inflation over coming quarters while contributing to a strengthening of economic activity in 2026 that would help stabilize labor market conditions after this year’s cooling. Those who preferred to keep the target range for the federal funds rate unchanged at this meeting expressed concern that progress toward the Committee’s 2 percent inflation objective had stalled in 2025 or indicated that they needed to have more confidence that inflation was being brought down sustainably to the Committee’s objective. These participants also noted that longer-term inflation expectations could rise should inflation not return to 2 percent in a timely manner. Some participants who favored or could have supported keeping the target range unchanged suggested that the arrival of a considerable amount of labor market and inflation data over the coming intermeeting period would be helpful in making judgments on whether a rate reduction was warranted. A few participants judged that lowering the federal funds rate target range at this meeting was not justified because data received over the intermeeting period did not suggest any significant further weakening in the labor market. One participant agreed with the need to move toward a more neutral monetary policy stance but preferred lowering the target range by 1/2 percentage point at this meeting.

In discussing risk-management considerations that could bear on the outlook for monetary policy, participants generally judged that upside risks to inflation remained elevated and that downside risks to employment were elevated and had increased since the middle of 2025. 

There is no consensus to reduce rates further at the January meeting. The CME Fedwatch data supports that view.

Looking ahead to March 18 meeting, the odds of a rate cut are slightly better than 50 percent.

No change in 48.7 percent. The probability of a one quarter-point cut at 44.2 percent with a 7.1 percent chance of a half-point cut.

The lack of good data was a huge problem for the Fed. Trump is crowing about the year-over-year CPI data. However, it’s still elevated and the BLS collection was lacking.

In the absence of data collection, the BLS imputed many prices, especially rent at zero.

The next CPI, PCE, and jobs reports will shed more light. But I am still sticking with my view that health care is going to put upward pressure of 1.5 to 2.0 percentage points on the PCE. And the PCE is the Fed’s preferred measure of inflation.

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