The Federal Reserve is widely expected to cut interest rates again next week, a move fueled by inflation data that met Wall Street’s expectations.
However, persistent inflationary pressures are prompting some central bank analysts to revise their forecasts for 2025, suggesting a more cautious approach than previously anticipated.
A more cautious Fed in 2025?
Loretta Mester, former president of the Cleveland Fed, anticipates a slowdown in rate cuts for 2025, stating, “I do think they will be slowing down” due to the stubborn nature of inflation.
While she still expects a rate cut next week, her previous prediction of four cuts in 2025 is now deemed unrealistic.
“Two or three cuts in 2025 ‘seems right to me’,” she told Yahoo Finance.
This sentiment is echoed by Greg Daco, chief economist at EY.
While he believes a 25 basis point reduction on December 18th is highly probable (“the markets ‘are very certain the Fed is going to proceed’”), he considers the likelihood closer to a “coin toss” given the persistent inflation.
He foresees the Fed signaling more widely spaced cuts in 2025, potentially pausing before the next reduction to assess the impact of the new Trump administration’s policies, which some believe could exert upward pressure on inflation.
“I think the Fed is going to want to be cautious,” Daco explained to Yahoo Finance.
Inflation remains sticky: CPI and core CPI data
The latest inflation figures from the Bureau of Labor Statistics support these cautious predictions.
The Consumer Price Index (CPI) rose 2.7% year-over-year in November, slightly higher than October’s 2.6% and aligning with economist forecasts. Core CPI, excluding volatile food and energy prices, climbed 3.3% for the fourth consecutive month.
This data bolstered market expectations for a Fed rate cut next week, pushing the probability to 96%.
The Fed has already implemented two rate cuts this fall.
While Fed Chair Jay Powell didn’t explicitly outline the Fed’s plans at its previous meeting, he indicated a more cautious approach due to the stronger-than-anticipated economy. “we can afford to be a little more cautious,” he stated.
Monitoring key economic indicators: PPI and core PCE
Before the upcoming December meeting, policymakers will carefully analyze additional economic data.
The Producer Price Index (PPI), a measure of wholesale inflation, released on Thursday, will be scrutinized alongside the CPI data.
These reports will inform estimates of the Fed’s preferred inflation metric, the core Personal Consumption Expenditures (PCE) index, which is scheduled for release on December 20th.
The core PCE index rose 2.8% in October, exceeding September’s 2.7%, indicating a persistent trend of sticky inflation.
Diverse perspectives on inflation and the labor market
The consistent stickiness of inflation this fall has raised some concerns.
However, Richmond Fed President Tom Barkin expects inflation to decline next year, attributing the recent flat readings to tougher year-over-year comparisons.
He suggests that inflation readings in the first quarter of 2025 could appear more favorable due to higher readings in the first quarter of 2024.
The labor market’s strength, previously a concern, now presents a less worrying picture.
Chicago Fed President Austan Goolsbee describes the job market as being “in that sustainable full employment kind of space,” after accounting for recent volatility.
He noted a long-term perspective on inflation, emphasizing the significant drop from its 9% peak in 2022.
“I still think we’re going to 2%,” he stated.
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