How will inflation set the Fed’s tone?
Recent inflation data has made the Fed’s outlook more complex. The Consumer Price Index (CPI) remains uncomfortably high, with core inflation recording a consistent monthly increase of 0.3% – too high for comfort.
Meanwhile, declining housing costs and an expected weakening in the November personal consumption expenditure (PCE) price index, due on December 20, indicate progress towards disinflation. These mixed signals have the Fed balancing its dual mandate of stable prices and maximum employment, likely signaling a cautious easing path through 2025, with only limited cuts on the table.
Will the Fed scale back interest rate cut expectations?
Markets have already priced in the December rate cut, but future cuts remain less certain. Futures contracts currently suggest three 25 basis point cuts in 2025, although Fed Chairman Jerome Powell may temper expectations during his post-meeting press conference.
A more hawkish tone is likely as the central bank takes into account President-elect Trump’s pro-growth policies, including tax cuts and tariffs, which could support consumer demand and complicate inflation control efforts. The Fed’s updated economic forecasts could show that policymakers are reluctant to cut aggressively, emphasizing a slower and more superficial path of easing.