The Fed cut interest rates by a quarter of a percentage point on Wednesday, in line with market expectations, even as inflation has accelerated again over the past two months.
Fed officials have been trying to find the right tempo of rate cuts since they began cutting rates by a deep half-point in September, but Wednesday's rate cut (the third in a row) was a It shows that the Fed is pressing ahead with its strategy despite underlying strength. price data.
The Fed now expects to cut rates two times next year instead of four.
“In terms of further rate cuts, we're going to look to further developments in inflation and continued strength in the labor market,” Fed Chairman Jerome Powell said on Wednesday.
After hurricanes and strikes brought the labor market to a standstill in October, the economy added a solid 227,000 jobs in November. Consumer price index (CPI) prices rose at an annual rate of 2.7%, up from 2.6% in October and 2.4% in September.
Excluding the more volatile energy and food categories, “core” consumer prices continued to rise at an annual rate of 3.3% in November, after rising slightly in October. Since July, wage growth has outpaced core price growth, with average hourly wages increasing at an annual rate of 4% in November.
Investors on Wednesday expressed concern that if prices continue to trend higher, the Fed's continued steady rate cuts may not be an option.
“If inflation remains above target in the new year, markets will be left wondering how much rate cuts the Fed could cut,” Joe Gaffoglio, CEO of Mutual of America Capital Management, said in a commentary Wednesday. may be too optimistic.”
Weak prices in the services sector, particularly in the housing sector, may be increasing confidence in the Fed's ability to cut interest rates. House price inflation has been running higher than the headline numbers since 2022, but slowed to an annualized 4.1% rise in November, despite an overall rise in prices.
Without protection from the CPI, inflation has hovered around the Fed's 2% target for the past year and a half.
“Housing services inflation has actually been declining steadily, albeit at a slower pace than we would like, but it is now significantly lower,” Powell said.
Mortgage interest rates are supported by interbank lending rates, and when interest rates rise, loan prices generally rise.
“For the past 18 months, the Fed has been fighting inflation on non-existent goods and services while exacerbating the housing affordability crisis,” Kitty Richards, a senior fellow at the Groundwork Collaborative think tank, said in a commentary.
“In the process, everything has become more expensive for every American family with car loans, student loans and relying on credit cards to make ends meet during difficult times.”
Economic forecasts released by the Federal Reserve in December showed that expectations for business results have generally increased. Central bank authorities raised their expectations for 2025 inflation in the Personal Consumption Expenditure Price Index to 2.5% from 2.1% in September. The core inflation rate has risen to 2.8% this year and 2.5% next year.
They forecast that gross domestic product (GDP) will increase by 2.5% in 2024, an upward revision from the 2.0% forecast in September. The unemployment rate is also expected to decline by 0.2 percentage points this year and 0.1 percentage points next year.
Some economists suggested that the Fed may have made a mistake by continuing to cut rates instead of pausing.
“We don't know why the Fed cut rates. Inflation development has stalled, at least temporarily. Demand is strong. Financial conditions have eased. It is inconsistent with the response function,” Jason Furman, former top White House economist for President Obama, said in a post on social platform X.
Asked about the incoming Trump administration and whether some of its policies, such as tariffs, could cause inflation, Powell said monetary policy is currently in a somewhat uncertain situation.
“When the road is uncertain, go a little slower. It's like driving on a foggy night or walking into a dark room full of furniture. Just slow down,” he says. said.
Updated at 2:52 PM ET
