Federal Reserve policymakers are signaling that further interest rate cuts are unlikely until inflation shows clearer progress toward the central bank’s 2% target, according to minutes from the January 28 Federal Open Market Committee (FOMC) meeting.
The minutes show officials view the labor market as stabilizing, with rates hovering near a neutral level, but some participants warned that inflation could remain above target longer than expected.
Some Fed participants favored a two-sided approach to policy, leaving the door open for rate increases should inflation remain high.
Analysts noted the Fed’s outlook for growth is unusually optimistic. “The combination of above-potential growth with easing inflation is not common in Fed projections and likely reflects a strong assumed boost from productivity and AI-related investment,” said Jeffrey Roach, Chief Economist at LPL Financial.
FOMC staff projected real GDP growth exceeding potential through 2028, with unemployment falling below the natural rate. Consumer spending, wealth effects, and heavy AI-related investment are expected to support this above-trend growth.
However, the minutes also highlight potential financial-stability risks from concentrated AI-related gains, high asset valuations, tight credit spreads, and leveraged hedge funds. The Fed flagged vulnerabilities in private credit and tech-heavy investments, cautioning that these factors could pose risks to market stability.
The Fed’s next monetary policy move is widely expected to come later this year, with many analysts anticipating the next rate cut could be as late as June, depending on inflation trends.