Fed Minutes Show Officials Wrestle With Policy Divide, AI Impact on Economy

Federal Reserve policymakers were in near-unanimous agreement to keep interest rates on hold at their meeting last month, but they remain divided on their next steps, with “a few” open to rate hikes if inflation continues to rise, others inclined to support further cuts if inflation falls as they expected, and a full table facing the emerging effects of the artificial economy.

The split seen in Fed Chairman Jerome Powell’s third-to-last meeting as head of the US central bank underscores the challenge facing former Fed Governor Kevin Warsh, President Donald Trump’s choice to succeed Powell in May, in convincing the policymaking group to support the level of cuts Warsh and Trump say are necessary.

The Federal Open Market Committee’s decision last month to hold interest rates at 3.50%-3.75% was shared by “almost all” policymakers, according to the minutes of the January 27-28 meeting released Wednesday. But the views expressed there include an AI-optimism about future productivity growth and the resulting inflation, and concerns mirroring that AI investments pose financial risks based on increased asset valuations and the involvement of “invisible private markets.”

“Several participants … expected higher productivity growth related to technological or regulatory developments to put downward pressure on overall inflation,” the minutes noted. “However, most participants cautioned that progress toward the Committee’s 2% target may be slower and more uneven than generally expected and decided that the risk of inflation continuing further above the Committee’s target is meaningful.”

AI brings enormous potential, risk and uncertainty

The debate at the January meeting showed a potentially challenging time ahead for Powell and Warsh, as policymakers grapple with a flurry of short-term economic data while trying to predict how, and how quickly, AI-driven economic restructuring might play out.

The Fed staff analysis, for example, expects strong growth to continue, an outlook consistent with what the Trump administration says its policies will achieve. But staff felt that growth would “outpace opportunities,” and penciled in rising earnings, “reflecting expectations that resource consumption will strengthen.” That’s contrary to the view, already endorsed by Warsh, that productivity gains will grow fast enough to support strong growth with little pressure on prices.

As AI is seen as a source of great potential, risk, and uncertainty, the Fed’s decision last month to temporarily pause its monetary easing seemed appropriate to assess where the economy stands after 75 basis points of rate cuts last year, the minutes said.

Only a “couple” of policymakers supported the alternative measure at the meeting. Fed Governors Christopher Waller and Stephen Miran both cast dissenting votes in favor of a rate cut based on concerns that the job market may be at risk of weakening.

Apart from that, opinions were broken among 17 other officials. The minutes, for example, include the first mention of a possible rate hike if inflation remains above the Fed’s 2% target. It is currently running about a percentage point above that level.

While inflation is expected to ease this year and is expected to pave the way for further rate cuts, the minutes state that “several participants indicated that they would support a bipartisan interpretation of the Committee’s future interest rate decisions, indicating that a further adjustment to the target range of the federal funds rate may be warranted if inflation remains at above-target levels.”

“Some” others feel that rates will need to be held “for some time” while they wait for new inflation and economic data, part of that group argues that cuts may not be appropriate at all until there is evidence that “inflation is back on track.”

“Several” officials, in contrast, said their initial outlook for inflation and the economy included further rate cuts.

“Policy makers are moving in different directions as inflation is higher than the Fed’s target. They can’t even agree on whether the current rates are fixed or neutral. The next chairman will have a difficult task to build a consensus,” said David Russell, head of global markets at TradeStation.

Fed leadership succession

The minutes put the debate at the January meeting in a twist as officials voted to keep the policy level steady at the current level and indicate it may remain there for some time.

After the minutes were released, investors held on to bets that the Fed would keep its policy rate on hold until the June 16-17 meeting, which is expected to be Warsh’s first, with a quarter-point rate cut expected at that session and the one in September.

Market prices do not indicate any chance of rate hikes in the foreseeable future.

The June meeting could be Warsh’s first as Fed chief if he is confirmed by the US Senate early to take over when Powell’s term as central bank chief ends.

The Fed’s next meeting is scheduled for March 17-18, where policymakers will provide updated economic and interest rates.

Data releases from the January meeting did little to settle the debate over whether the Fed should prioritize putting more pressure on inflation by leaving borrowing costs where they are or supporting employment and economic growth with cheap credit.

Consumer price inflation in January was weaker than expected, but job growth this month beat expectations and the unemployment rate fell, as most officials said they expected strong economic growth to continue.

(Reporting by Howard Schneider; Additional reporting by Ann Saphir; Editing by Andrea Ricci and Paul Simao)