At the monetary policy meeting of 27–28 January, US policymakers opted by a very large majority to leave interest rates unchanged.
Of the twelve voters, only two, both close to President Trump, dissented favouring a further rate cut in line with the White House’s preferences.
Behind this broad consensus, however, the minutes of the meeting reveal significant internal divisions. In particular, policymakers remain deeply split over the outlook for inflation.
Diverging views on inflation
Some members argue that inflation (2.4% in January) remains elevated due to tariffs and could stay durably above the Federal Reserve’s 2% target. In a worst-case scenario, they suggest that policy rates might even need to be raised to ensure the objective is met.
Others point instead to the sharp decline in inflation from 3% a year ago and anticipate a marked moderation in price pressures, supported by substantial productivity gains from new technologies. With the labour market effectively stalled (only 311,000 jobs created over the past thirteen months), they consider it necessary to continue lowering the policy rate.
Implications for investors
These pronounced divergences have surprised investors, who had anticipated several rate cuts this year.
That scenario is no longer assured. Clear evidence of easing inflationary pressures will be required for a majority of policymakers to endorse further rate reductions. In the absence of such confirmation, the status quo is likely to prevail.
This outlook has weighed on US equities, which have underperformed other major markets. Despite this recent relative weakness, we remain confident in US equities. They continue to play an essential role in any properly diversified portfolio, such as the Optimize Invest Selection, advised by Euroconsumers Invest:
