Review of Risks Pinpointed by Recent FOMC Minutes

The Federal Open Market Committee (FOMC) minutes highlighted several risks in the current economic and monetary landscape:

Monetary Policy Framework Review: The Fed’s monetary policy framework is under review, focusing on the Committee’s Statement on Longer-Run Goals and Monetary Policy Strategy, and policy communication practices. However, the 2 percent longer-run inflation goal will remain unchanged.

Global Inflation Trends: Inflation has eased in most advanced foreign economies due to lower energy prices, but services price inflation remains high in some regions like Germany. In China, inflation is close to zero, reflecting lower food prices. These disparities pose a risk to global economic stability.

US Economic Conditions: The financial sector faces significant vulnerabilities, including high regulatory capital ratios, long-duration assets held by banks, and moderate funding risks. Credit availability remains tight for smaller firms, and conditions in U.S. short-term funding markets have generally stabilized but still pose potential risks.

Economic Outlook for 2025: There is significant uncertainty regarding potential changes in trade, immigration, fiscal, and regulatory policies. While inflation is projected to decline to 2 percent by 2027, core inflation has not decreased as expected, and changes in trade policy could increase inflationary pressure.

Labour Market and Consumer Spending: Labour market conditions have remained solid, but low- and moderate-income households continue to experience financial strains, potentially dampening their spending. Any increase in reported inflation at the beginning of the year could imply challenges in interpreting economic data accurately.

Business Investment and Economic Outlook: Business investment has been strong but appears to have slowed in the fourth quarter. High uncertainty makes it crucial for the FOMC to carefully consider additional adjustments to the stance of monetary policy. Policy adjustments could be necessary if economic conditions change, such as labour market deterioration or inflation rising unexpectedly.

Federal Open Market Operations: The Committee has directed the Desk to maintain the federal funds rate in a target range of 4-1/4 to 4-1/2 percent through various operations. These measures aim to manage funding risks, but any changes in economic conditions could necessitate policy adjustments.

Commitment to Goals and Upcoming Meetings: The Committee remains committed to supporting maximum employment and returning inflation to its 2 percent objective. They are prepared to adjust the stance of monetary policy if risks emerge that could impede the attainment of these goals.

These risks underscore the importance of ongoing monitoring and careful adjustment of monetary policy to navigate the uncertainties in the global and domestic economic landscape.