Unease about inflation's persistence and potential policy shifts under a new White House administration dominated the Federal Reserve's December meeting, leaving policymakers divided on the pace of future rate adjustments.

Minutes from the Dec. 18 Federal Reserve meeting that were released Wednesday paint a cautious picture of the central bank's outlook on inflation and interest rates.

The Fed cut rates by 25 basis points at the meeting, bringing the federal funds rate to 4.25%-4.5%, and emphasized the path ahead would require a delicate balance between curbing inflation and supporting economic growth.

“Participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” according to the Fed’s December minutes.

The minutes also highlight rising uncertainty about inflation and the broader economy, particularly as fiscal and trade policies face potential shifts under the incoming Donald Trump administration.

Why Is Inflation Anxiety Rising Again?

While inflation has shown signs of moderating, "recent higher-than-expected readings on inflation" suggest it could take longer to return to the 2% target, the minutes say.

Cleveland Fed President Beth Hammack was the sole dissenting vote against an interest rate cut in December, favoring an unchanged rate target of 4.5%-4.75%.

Hammack indicated "uneven progress" toward the Fed's inflation target, alongside robust labor market and economic conditions, as key reasons not to cut interest rates further.

The prospect of significant policy shifts under Trump has left Fed officials navigating uncharted waters. Key campaign promises, such as reworking trade agreements, imposing tariffs and enacting tax reform, could have sweeping impacts on the U.S. economy, particularly on inflation.

"A number of participants indicated they had incorporated placeholder assumptions regarding potential trade and immigration policy changes into their projections," the minutes state, highlighting the Fed's uncertainty about the fiscal environment ahead.

"The effects of potential changes in trade and immigration policy suggested that the process [of reaching the 2% inflation target] could take longer than previously anticipated," the minutes say.

Inflation, Economic Projections Adjusted

The Fed updated its economic projections at the December meeting, and they showed a slower pace of cuts through 2025.

The central bank now projects two 25-basis-point rate reductions next year, down from the four forecasted in September. By the end of 2025, the federal funds rate is expected to hover around 3.9%, with a further decline to 3.4% in 2026.

Notably, the Fed raised its inflation forecasts. Headline Personal Consumption Expenditure inflation for 2025 is now expected to reach 2.5% compared to a prior estimate of 2.1%. Core PCE inflation, which excludes volatile food and energy prices, is projected at 2.5%, up from 2.2%.

Market Reactions

Markets showed muted responses to the Fed minutes, suggesting the hawkish tone from the December meeting had already been priced in by investors.

The U.S. dollar index – as tracked by the Invesco DB USD Index Bullish Fund ETF – held steady at the 109 level, maintaining its 0.4% intraday gain.

Equities experienced a modest relief rally, with the S&P 500, tracked by SPDR S&P 500 ETF Trust ( SPY ) , reversing earlier losses to trade marginally higher for the session.

Treasury yields were largely unchanged. The 10-year yield hovered at 4.69%, while the 30-year yield remained stable at 4.93%, signaling little movement in bond markets.

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