Fed fears that tariffs may affect inflation and calls for 'rate cut slowdown,' the Fed echoes: balance sheet reduction may slow down or pause

The Federal Reserve released the minutes of the January meeting on Wednesday, showing that Fed policymakers expressed concerns about the impact of Trump's tariff policy on inflation and tended to adopt a wait-and-see attitude, believing that more evidence of inflation slowing down is needed before further rate cuts. (Background: Trump wants the chief economic adviser to 'regularly express concerns' to Fed Chairman Powell, increasing pressure on the Fed to cut rates?) According to the minutes released by the Fed on Wednesday, Fed officials unanimously agreed that further rate cuts will only be considered after seeing inflation further decrease, expressing concerns about the impact of Trump's tariff policy on inflation. Worries about tariff impact on inflation may delay rate cuts. Federal Open Market Committee (FOMC) policymakers unanimously decided at the January meeting to keep the Benchmark Interest Rate unchanged, following three consecutive rate cuts in 2024 totaling 1% reduction. CNBC reported that when making this decision, officials discussed the potential impacts of Trump's new government, including tariffs, reduced regulations, and tax cuts, stating that the current monetary policy is 'clearly less restrictive' compared to before the rate cuts, giving officials time to assess the economic situation before further action. Members pointed out that the current policy allows time to assess changes in economic activity, the labor market, and inflation, with most still leaning towards a tightening stance, hoping to see further inflation decline before considering additional adjustments to the Federal Funds Interest Rate target range. Fed officials expressed concerns that policy changes could keep inflation above the Fed's target, with FOMC members mentioning the 'potential impact of trade and immigration policy changes and strong consumer demand,' indicating that businesses in multiple regions may pass on the increased costs due to rising tariffs to consumers. Fed Chairman Powell typically avoids speculating too much on the impact of tariffs, but other officials have expressed concerns and admitted that Trump's policies could affect Fed decisions, delaying rate cuts and according to CME FedWatch data, the market currently expects the Fed to cut rates again in July or September. Considering slowing down or pausing balance sheet reduction. Nick Timiraos, a reporter for The Wall Street Journal, often referred to as the Fed's 'megaphone,' stated that the minutes of the January meeting show that officials discussed whether to slow down or pause the reduction of its nearly $6.8 trillion asset portfolio at last month's meeting, as they will face a complex situation in the coming months due to the need to raise the federal debt ceiling. Nick Timiraos pointed out that dynamics related to the debt ceiling could lead to significant fluctuations in the Fed's liabilities (reserves), and the balance sheet reduction process could eventually deplete the banking system's reserves, with Fed officials unsure how long this process will last. The Treasury's management of the currency market fluctuations caused by managing its cash balance could complicate the Fed's ability to determine the correct reserve balance. Therefore, based on the minutes, officials at the January meeting believe that 'considering pausing or slowing down the balance sheet reduction until the debt ceiling issue is resolved may be appropriate'.