The minutes of the Fed meeting reveal a significant division: some officials support further rate cuts, while others suggest the possibility of a rate hike.

The latest meeting minutes released by the Federal Reserve once again revealed a huge division within the decision-making group regarding the future direction of interest rates. In addition to supporters of rate cuts and the wait-and-see camp, the minutes also explicitly mentioned for the first time that some people discussed the possibility of raising rates. This reflects that, with inflation persistently higher than the Fed's 2% target and the economy remaining resilient, the Fed's policy focus has shifted back to inflation risks, rather than slowing employment. The meeting minutes released on Wednesday, the 18th, showed that at the Federal Open Market Committee (FOMC) meeting at the end of January, "several" participants indicated their support for using a "two-way" approach in the forward guidance on interest rates, reflecting that if inflation remains above the target level, it may be appropriate to raise rates. This wording indicates that some officials are increasingly worried about inflation stickiness. Several other participants believed that if inflation were to decrease as expected, it may be appropriate to further lower interest rates. However, most participants warned that the process of inflation falling to 2% may be "slower and more uneven" than generally expected. The vast majority of participants judged that the downside risks to employment in recent months have eased, but the risks of more persistent inflation still exist. The use of the word "several" multiple times in these minutes highlights the degree of differences in views within the FOMC. After the release of the meeting minutes from November last year that exposed internal divisions within the Federal Reserve, media and journalist Nick Timiraos, known as the "New York Fed News Agency," pointed out that in the Fed's statements, the number of people represented by "many" is less than "most," but more than "several." Possibility of two-way interest rate path The FOMC decided to pause the rate cut at its meeting on January 27-28, as expected by the market. Two of the 12 FOMC voting members dissented from this decision. The two dissenters - Governor Waller, who was then one of the candidates for the Fed chair, and another Governor appointed by President Trump, supported a further 25 basis points rate cut. The meeting minutes released on Wednesday showed that some Fed policymakers at the January meeting took a cautious stance on further rate cuts, at least in the short term, when discussing the outlook for monetary policy. The minutes stated: "Several participants cautioned that further easing of monetary policy in the context of elevated inflation readings could be misinterpreted as a weakening of policymakers' commitment to the 2% inflation target." This position contrasts with the views of another group of officials. The minutes showed that several officials believed that if inflation were to decrease as expected, the possibility of further rate cuts still existed. However, most officials said that the progress of inflation might be slower than generally predicted. All participants agreed that monetary policy does not follow a preset path, but is determined by a variety of the latest data, changing economic outlooks, and balancing risks. Inflation concerns remain a core focus Participants observed that overall inflation in the United States has fallen significantly from its peak in 2022, but is still slightly above the Fed's long-term target of 2%. They generally pointed out that these elevated readings are largely reflective of core goods inflation, which seems to have been driven by tariff increases. Regarding the outlook for inflation, participants expected inflation to trend towards 2%, but the pace and timing of the decline are still uncertain. Participants generally expected the impact of tariffs on core goods prices to weaken starting this year. Several participants mentioned that the ongoing moderation in housing services inflation could continue to exert downward pressure on overall inflation. Several participants also expected that productivity improvements related to technology or regulation would help to lower inflation. Consistent with this view, a few participants mentioned reports from business contacts who expected to raise prices this year to address cost pressures, including those related to tariffs. Most participants warned that progress towards the 2% inflation target might be slower and more uneven than generally expected, and that the risks of inflation persisting higher than the target should not be ignored. Some participants cited reports from business contacts who expected to raise prices this year to address cost pressures, including those related to tariffs. Several participants also suggested that sustained demand pressures could keep inflation elevated. Stable signs in the labor market Regarding the labor market, participants observed that the U.S. unemployment rate has remained mostly steady in recent months, while job growth remains subdued. Most participants pointed out that recent data on unemployment, layoffs, and job vacancies suggest that labor market conditions may be stabilizing after a gradual cooling period. Almost all participants noticed that while layoff levels remained low, hiring also remained subdued. Consistent with this observation, several participants noted that their business contacts continued to show caution in hiring decisions, reflecting uncertainties about the economic outlook and the impact of artificial intelligence and other automation technologies on the labor market. The vast majority of participants believed that there were signs of stabilization in the labor market and that the downside risks to the labor market had diminished. However, some participants pointed out that while there were signs of stabilization in the labor market, some indicators such as surveys on job availability and the proportion of people working part-time for economic reasons still suggested softness in the market. In addition, most participants noted that the downside risks to the labor market still exist. Robust economic growth Participants observed that economic activity appears to be expanding at a robust pace. They generally noted that consumer spending has remained resilient, largely due to the growth in household wealth. Business fixed investment remains strong, especially in the technology sector. Participants generally expected the pace of economic growth to remain robust in 2026, although there is still a high degree of uncertainty about the outlook for growth. Most participants expected growth to be supported by continued favorable financial conditions, changes in fiscal policy, or regulatory policy. Furthermore, given the strong pace of investment related to artificial intelligence and high productivity growth in recent years, several participants believed that continued productivity gains would support economic growth. Data released since the Fed's meeting at the end of January show that U.S. economic growth has accelerated, inflation has slowed, and the labor market has stabilized. Due to lower energy costs, the January CPI growth was lower than expected by the market. In January, non-farm payrolls increased by 130,000, the largest gain in over a year, and the unemployment rate unexpectedly dropped to 4.3%, indicating that the labor market continued to stabilize at the beginning of the year. Market trading data shows that investors have lowered their expectations for the timing of the next rate cut by the Federal Reserve, but futures contracts pricing implies that traders still see a possibility of a rate cut before June. Several Fed officials have stated since the January meeting that the overall stable U.S. economy has provided space for them to remain patient in considering further adjustments to interest rates. However, President Trump and his administration officials continue to call for an immediate rate cut. After the strong job growth reported last week, the market has ruled out the possibility of a rate cut in March, and the expectation for rate cuts for the whole year remains dovish compared to the end of January. Financial stability risks related to AI and private credit draw attention When discussing financial stability, several participants mentioned that asset valuations are high and credit spreads are at historically low levels. Some participants discussed the vulnerabilities that recent developments in the field of artificial intelligence (AI) could bring, including overvaluation in the stock market, market capitalization and activity concentrated in a few companies, and increased debt financing. Some participants emphasized the vulnerabilities related to private credit and the provision of credit to high-risk borrowers, including risks associated with other types of non-bank financial institutions (such as insurance companies), and banks' exposure to this area. Several participants commented on the risks related to hedge funds, including their growing footprint in the government bond and stock markets, increased leverage, and the continued expansion of relative value trades that could make the government bond market more susceptible to shocks. This article is from "Wall Street Observer," written by Li Dan, GMTEight edited by Li Cheng.