The minutes of the January FOMC meeting confirmed the message that Chair Powell gave at the January press conference and his subsequent Congressional testimony: that the Fed is in no hurry to cut rates further — but also retains its easing bias. The minutes revealed that participants saw the “current high degree of uncertainty” as warranting a “careful approach” to changing monetary policy. With inflation still “somewhat elevated,” participants indicated they want to see further progress on inflation before adjusting rates. But as with Powell’s press conference remarks, the decision was characterized as a choice between holding policy at a restrictive level if inflation remained elevated, and easing policy further if the economy or labor market cooled — or inflation returned to 2% faster than anticipated. Only “a few” thought policy was already close to the neutral rate, with the “vast majority” viewing policy as still-restrictive, albeit “significantly” less so than when the Fed started easing last September.

Although the Committee generally saw the labor market as solid, participants acknowledged that progress toward the inflation target had slowed more recently. Year-ago core PCE inflation has largely moved sideways over the past several months, although — as noted in the minutes — there has been more progress in cumulative inflation over shorter horizons, such as three- and six months. There was a more in-depth discussion of how to interpret various components of the recent inflation news, with many concluding that “additional evidence” would be needed to indicate that inflation was on track for a sustainable return to target.

Additionally, while the Committee largely saw risks around the real side of the economy as broadly balanced, participants portrayed inflation risks as skewed to the upside, citing “potential changes in trade and immigration policy” and strong consumer demand as factors that might hinder disinflation. There also was concern that firms might try to pass higher input costs from tariffs onto consumers, with a couple of participants suggesting it might be difficult for a time to distinguish between temporary and more persistent changes in inflation due to government policy changes. Some noted recent moves up in market- and survey based measures of expected inflation, but many countered that longer-term inflation expected remained well-anchored.

Outside of the usual discussion of the economic outlook and policy, two aspects of the balance sheet received specific mention. First, following a briefing by the deputy manager, many FOMC participants supported the idea of shifting the maturity profile of the SOMA portfolio to align with the outstanding stock of Treasury debt, while minimizing risks for market disruptions. Second, upcoming debt limit dynamics were seen as potentially creating significant swings in reserves in coming months, and “various” participants thought it thus might be appropriate to slow or pause runoff until this issue was resolved.

Chair Powell indicated during his press conference that initial discussion on the upcoming framework review had occurred at the January meeting, and the minutes revealed that focus would be on the approach to the conduct of monetary policy, specifically the Statement on Longer-Run Goals and Monetary Policy Strategy, and on Fed communications. (As Powell stressed earlier, the 2% inflation target will be retained and is not part of this review.) Some of the changes last made to the Statement in 2020 in the aftermath of the GFC were highlighted as worth reconsidering, with the Committee stressing the need for the framework to be robust to a wide range of economic situations. No details of potential specific changes to communication were mentioned. This framework review is expected to last through the summer, followed by a report to the general public later this year.