A serious split over the direction of interest rates has emerged inside the Central Bank, the Federal Reserve (Fed). President Donald Trump is pressing hard to lower rates, but the minutes show that many Fed Commissioners voiced caution that rates should be raised further if inflation rises again.
On top of that, the economic ripple effects that artificial intelligence (AI) may bring have emerged as a new variable in currency policy, deepening the Fed's dilemma.
According to the minutes of the Jan. Federal Open Market Committee (FOMC) regular meeting released by the Fed on the 18th (local time), Fed Commissioners unanimously agreed at last month's meeting to keep the benchmark interest rate unchanged at 3.50%–3.75%. The FOMC is the top decision-making body that sets U.S. currency policy, holding eight regular meetings a year to assess economic conditions and determine interest rate levels.
It looked unanimous on the surface, but a tense standoff unfolded among Commissioners over the future path of rates. According to Reuters, "several" Commissioners suggested that if inflation remains above target, it may be appropriate to adjust rates upward. That runs counter to market expectations that rate cuts would begin soon. It is interpreted to mean that even within the Fed there is a lack of confidence that inflation has been firmly tamed.
Since taking office, President Trump has consistently and publicly argued that rates should be lowered to boost the U.S. economy. The claim is that rates are excessively high, dampening corporations' investment and increasing the burden on the household. But the Fed must set currency policy independently, free from political headwinds. The mention in these minutes of a possible rate increase is seen as reflecting the Fed's resolve not to yield to the administration's pressure for rate cuts.
The labor market picture is also mixed. The Fed has a dual mandate to achieve maximum employment and price stability at the same time. According to Fed data, job growth in the United States has recently slowed, and the unemployment rate shows signs of stabilizing. If the job market cools, rates should be cut, but if inflation remains high, it is hard to lower rates. Commissioners acknowledged that uncertainty about the economic outlook is higher than ever and struck a cautious tone, saying they will closely watch incoming data.
Market analysts say the Fed's situation is highly tricky. If the tariff policy or large-scale tax cut plan pushed by the Trump administration is implemented, there is a risk that inflation will surge again. If the Fed delivers the rate cuts the president wants and inflation soars, it will be hard to avoid harsh criticism of policy failure. Conversely, if it sticks with high rates and the economy slips into recession, pressure from the government and political circles is expected to intensify.
At this meeting, the Fed for the first time took up the impact of artificial intelligence on the broader economy as a main agenda item. Fed Commissioners focused on how much AI technology could lift labor productivity. Higher productivity can ease inflationary pressures, creating a favorable environment for rate cuts. At the same time, Commissioners held in-depth discussions about AI's negative effects on jobs and uncertainties stemming from changes in the economic structure. This suggests that AI, as a new technological variable, will become a key indicator in the Fed's process of setting interest rates going forward.