Internal divisions within the Federal Reserve have intensified further. According to the monetary policy meeting minutes released by the Fed in the early hours of February 19, Beijing time, several officials indicated that further interest rate cuts would likely be appropriate if inflation declines as they anticipate. However, some policymakers expressed caution regarding additional easing. Notably, the minutes for the first time mentioned that officials discussed the possibility of raising interest rates, revealing significant disagreement among Fed decision-makers on the future path for interest rates.
In market action, the three major U.S. stock indices collectively rose overnight. The Nasdaq Composite surged more than 1.4% at one point during the session, while the S&P 500 gained nearly 1%. At the close, the Dow Jones Industrial Average was up 0.26%, the S&P 500 rose 0.56%, and the Nasdaq advanced 0.78%. Large-cap technology stocks generally climbed, with Nvidia and Amazon each gaining over 1%. Apple, Google, Microsoft, Meta, Tesla, and Broadcom all closed with modest increases. Memory chip stocks strengthened across the board, with Micron Technology soaring more than 5% and Western Digital jumping over 4%.
The Federal Reserve, in minutes dated February 18, Eastern Time, from its January policy meeting, revealed substantial divergence in discussions about the interest rate path, with the possibilities of rate cuts, a pause, and even rate hikes all being mentioned. During the January meeting, some officials believed that if inflation declines as expected, it could be appropriate to reduce rates further. In stark contrast, a few participants suggested that the possibility of resuming rate increases should not be ruled out and expressed a desire for the post-meeting statement to more clearly reflect that policy decisions are "two-sided." This language signals a marked increase in officials' concerns about persistent inflation.
Most officials warned that the process of inflation returning to the 2% target might be "slower and more uneven" than generally anticipated. A vast majority judged that downside risks in the labor market had diminished in recent months, but the risk of more persistent inflation remains.
Looking back, at the policy meeting concluded on January 27-28, the Fed decided to pause its rate-cutting cycle. Among the 12 voting members, two dissented: Fed Governor Waller and Governor Milan, both supporting a further 25-basis-point cut. The newly released minutes show that when discussing the policy outlook in January, some officials were cautious about further rate cuts, at least in the near term. The minutes stated, "Some participants cautioned that further policy easing in the context of elevated inflation data could be misinterpreted as a weakening of the Committee's commitment to its 2 percent inflation goal." The minutes also indicated that some officials still saw the possibility of further cuts if inflation falls as expected.
Commenting on this, Charlie Ripley, a senior executive at Allianz Investment Management, interpreted, "From our perspective, the minutes support our view that a Fed rate cut is not imminent in the foreseeable future." Nick Timiraos, known as the "Fed whisperer," noted that officials' concerns about the labor market have eased while inflation worries have increased, with participants describing above-target inflation as "a significant risk."
Regarding the future path for rate cuts, recent data shows that while overall U.S. inflation has fallen significantly from its 2022 peak, it remains above the Fed's 2% target. The minutes indicated that Fed officials generally viewed elevated inflation readings as largely reflecting core goods inflation, seemingly driven by the effects of increased tariffs. On the inflation outlook, officials projected inflation would move down toward 2%, but the pace and timing remain uncertain. The impact of tariffs on core goods prices might begin to fade this year.
Most officials warned that progress toward the 2% inflation goal could be slower and more uneven than generally expected, and the risk of inflation persisting above target should not be overlooked. Some participants also suggested that persistent demand pressures could keep inflation elevated.
On the labor market, Fed officials observed that the U.S. unemployment rate had been largely flat in recent months, while job growth remained moderate. Most officials noted that recent readings on unemployment, layoffs, and job openings suggested labor market conditions might be stabilizing after a period of gradual cooling. A strong majority judged that conditions had shown signs of stabilization and that downside risks had diminished. However, some participants pointed out that although the labor market shows signs of stabilizing, indicators such as surveys of job availability and the share of people working part-time for economic reasons still suggest some softening. Furthermore, most officials noted that downside risks to the labor market remain.
Data released since the late-January Fed meeting showed U.S. January CPI growth came in below market expectations. Non-farm payrolls increased by 130,000 in January, the largest gain in over a year, while the unemployment rate unexpectedly fell to 4.3%, indicating the labor market continued to stabilize at the start of the year.
Market trading data shows investors have pushed back expectations for the timing of the next Fed rate cut, but futures pricing still implies traders see a chance of a cut before June. According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut by the March meeting is 5.9%, with a 94.1% chance of rates remaining unchanged. The probability of a cumulative 25-basis-point cut by April is 20.5%, with a 78.5% chance of unchanged rates and a 1.0% chance of a 50-basis-point cut. The probability of a cumulative 25-basis-point cut by June is 49.8%.