According to the minutes from the Federal Open Market Committee (FOMC) meeting on 28-29 January, policymakers agreed that provided the economy remains close to full employment, they would need to see further progress on inflation before making any adjustments to the federal funds rate. Their stance? Cautious patience—though inflation is proving more stubborn than anticipated, that patience may soon wear thin.

The minutes, released on Wednesday, revealed that “many participants noted the committee could keep the benchmark rate at a restrictive level if the economy remained strong and inflation stayed elevated.” With the federal funds rate held in the 4.25% to 4.5% range, the Fed is effectively betting that time—and a touch of restraint—will do the heavy lifting in taming inflation.

While markets are currently pricing in a rate cut in 2025, with a potential second one on the horizon, the Fed remains non-committal. Policymakers appear more concerned about another debt ceiling standoff in Washington, which could trigger financial turbulence. Some officials suggested that should such volatility emerge, it might be wise to pause or slow the balance sheet runoff. Currently, the Fed allows up to $25 billion in Treasury securities and $35 billion in mortgage-backed securities to mature each month without reinvestment.
Meanwhile, the U.S. government hit its statutory debt limit in January, forcing the Treasury to deploy “extraordinary measures” to keep the lights on. President Donald Trump has backed a Republican plan to raise the debt ceiling by $4 trillion, though any resolution is expected to be mired in lengthy political wrangling.

Adding another layer of complexity, Fed officials are closely monitoring Trump’s economic agenda, which includes aggressive tariffs on trade partners and a crackdown on immigration. Both policies could have profound implications for inflation, the labour market, and overall economic growth.
While the Fed minutes described economic risks as “broadly balanced,” they also emphasised the upside risks to inflation, citing potential supply chain disruptions from geopolitical tensions, policy shifts on trade and immigration, and unexpectedly strong consumer spending. Despite these concerns, officials still expect inflation to gradually decline toward their 2% target—assuming that the economic landscape does not shift dramatically under the weight of new policies.

January’s meeting also marked the beginning of the Fed’s five-yearly review of its monetary policy framework. Officials are set to reassess the lessons learned from the post-pandemic inflation surge and the central bank’s response. They will also scrutinise key elements of the 2020 framework review, including the strategy of compensating for shortfalls in full employment and allowing inflation to exceed 2% following periods of prolonged weakness moderately.
This latest review is expected to conclude by the end of the summer, potentially paving the way for adjustments in how the Fed communicates and executes its policy decisions. Meanwhile, some policymakers have suggested refining the Fed’s balance sheet structure to better align with the composition of Treasury debt while minimising market disruptions.

In short, the Fed is staying the course—at least for now. However, with inflation refusing to fade quietly, policy uncertainty in Washington, and Trump’s trade war redux looming on the horizon, the path ahead is anything but smooth. Whether the Fed’s patience is a virtue or a costly miscalculation remains to be seen.