Minutes from the Federal Reserve’s December policy meeting, released Wednesday, reinforced expectations of a cautious monetary stance as officials grapple with persistent inflation and a resilient labor market.
The minutes highlighted widespread uncertainty among policymakers about the future path of inflation, growth, and interest rates.
In fact, according to LPL Financial’s Jeffrey Roach, the word “uncertain” or its variations appeared 12 times in the document.
Roach, chief economist at LPL Financial, emphasized the growing unpredictability in economic modeling.
"Forecasters find it increasingly difficult to model out the path for interest rates, growth, and inflation because of the uncertainty surrounding Trump policies still being developed," he said, referencing the minutes' acknowledgment of global economic divergence and limited domestic inflation pressures.
What could this mean for the Fed’s future rate policy? Larry Tentarelli, Chief Technical Strategist at Blue Chip Daily Trend Report, noted that the minutes align with market expectations. "The Fed funds futures market is pricing in only one 25-basis point rate cut for 2025, and not until the June 18 meeting," he said.
Tentarelli pointed to core inflation as a key concern, with November’s 12-month core Personal Consumption Expenditures (PCE) index at 2.4%, still above the Fed’s 2% target. Projections from the Cleveland Federal Reserve Bank’s Inflation Nowcasting model suggest core PCE could rise to 2.87% in December.
Meanwhile, the labor market continues to defy expectations of a slowdown, with weekly jobless claims at 201,000, below a Bloomberg consensus forecast of 215,000. "Based on the combination of sticky inflation and a strong labor market, we believe the Fed may stay on pause for the next few meetings unless there is notable weakness in the labor market or incoming economic data," Tentarelli added.
The Fed’s disinflationary progress appears to have stalled, although officials remain optimistic about inflation returning to the 2% target over time. Markets are watching closely for signals in upcoming economic data, including Friday’s nonfarm payrolls report.
“Markets could get choppy if there’s a surprise in the payroll release,” LPL’s Roach warned.
A softer job market could prompt rate cuts sooner, but Tentarelli expects no rate cuts in the first quarter of 2025. He anticipates 10-year US Treasury yields to remain in the 4.50% to 5.00% range, with potential upside if Friday’s report exceeds expectations.