Kenny Polcari, chief market strategist at Slatestone Wealth, discusses whether the Fed can live with 3% inflation on Varney & Company.
federal Reserve Minutes from last month’s monetary policy meeting of the central bank were released on Wednesday, showing that policymakers expect further interest rate cuts, but remain committed to getting inflation back to the 2% target.
The Federal Open Market Committee (FOMC), which guides the Fed’s monetary policy moves, voted in September to cut the benchmark federal funds rate by 25 basis points to a range of 4% to 4.25%. That move led to the first cut in interest rates in 2025, but it happened Inflation remains high The Fed’s long-term 2% inflation target.
The most recent reading of the consumer price index (CPI) was up 2.9% year over year in August, while the Fed’s favorite inflation gauge – the personal consumption expenditures (PCE) index – was up 2.7% from last year. Those metrics were much lower earlier this year, with CPI at 2.3% and PCE at 2.2% in April.
Fed Chairman Jerome Powell indicated that the Fed is attentive to risks on both sides of its dual mandate of maximum employment and stable prices. (Kent Nishimura/Bloomberg via Getty Images/Getty Images)
The FOMC said, “Most participants emphasized upside risks in their outlook for inflation, pointing to inflation readings rising beyond 2 percent, uncertainty about the effects of tariffs likely to continue, inflation likely to prove more stable than currently expected even after the inflationary effects of this year’s tariff increases subside, or a prolonged period of higher inflation readings.” “Long-term inflation expectations are likely to rise thereafter.”
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The FOMC noted that participants generally thought that “this year Tariff increases Inflation pressures had increased, with some commenting that these effects had been somewhat less so far than expectations earlier in the year.
The minutes said policymakers generally thought inflation would be close to target but for high tariffSome believe that “trade contacts had indicated that they would raise prices over time due to the higher costs resulting from tariff increases.”
“Uncertainty remains about the inflationary effects of tariff increases this year, although most participants expect these effects to be felt by the end of next year,” the FOMC said.
The minutes revealed that some policy makers thought that increase in inflation The Fed may need to leave rates unchanged this year.
“These participants noted that progress toward the Committee’s 2% inflation target has stalled this year as inflation readings have increased and expressed concern that long-term inflation expectations could rise if inflation does not return to its objective on time.”
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Despite concerns about the future direction of inflation, policymakers moved ahead with interest rate cuts The labor market is weakeningBecause officials noted that the risk of a decline in employment has increased since the last meeting.
He described the low hiring and firing rates as “evidence of low mobility in the labor market.” Concentrated job gains in certain economic sectors, and a rise in the unemployment rate among groups sensitive to cyclical economic changes – including African Americans and young people – were other data points showing labor market softness.
With the FOMC moving forward 25-basis-point cut In September, “Almost all participants noted that, with the reduction of the target range for the federal funds rate at this meeting, the Committee was well positioned to respond in a timely manner to potential economic developments.”
What is the Fed’s outlook for interest rate cuts, inflation, and jobs for the remainder of the year?
Fed Governor stephen miranAttending his first FOMC meeting since being confirmed in the role last month, he was the only policymaker to vote for the 50-basis-point cut and dissent from the panel’s vote.
The FOMC minutes showed that policymakers have differing views about the path to further rate cuts. “Most believe further easing of policy over the remainder of the year would be appropriate,” the Fed said. “Some participants noted that, by many measures, financial conditions suggested that monetary policy could not be particularly restrictive, which they saw as requiring a cautious approach when considering future policy changes.”
According to the CME FedWatch tool, the market reaction to the FOMC minutes shows that the Fed is still expected to cut by 25 basis points at the next two meetings in late October and mid-December.
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LPL chief economist Jeffrey Roach said in a note that tariffs “will maintain upward pressure on inflation in the near term. The inflation target is unlikely to be reached until the end of 2027, which means these pressures are stickier and more persistent than anticipated several months ago, but still, that does not mean we will not see a recovery in 2026.”
“Futures markets may be more accurate than the FOMC’s collective projections, especially if inflation continues to fall into 2026. Investors should expect two more cuts this year but a pause until the January 2026 meeting,” Roach said.
