Fed Lowers Rates Again, But Inflation Concerns Linger
The federal Reserve (Fed) took another step Wednesday, trimming its benchmark interest rate by a quarter-point for the third consecutive time. This brings the federal funds rate to a range of 4.25% to 4.50%, aligning with market predictions. However, this move isn’t without its critics.
The decision wasn’t unanimous within the Federal Open Market Committee (FOMC). At least one member, Beth Hammack, publicly voiced opposition to further rate reductions. This dissent reflects a growing unease among analysts who question the wisdom of lowering rates given a recent uptick in inflation after months of progress toward the Fed’s 2% annual target.
Fed Chair Jerome Powell acknowledged the ongoing debate, stating, “Inflation has slowed significantly over the last two years but it remains relatively high compared to our long-term objective of 2%.” He offered reassurance, though, suggesting the Fed is nearing the end of its rate-cutting cycle. “We are getting very close to the neutral rate,” Powell explained, indicating a more cautious approach to future adjustments. The Fed now projects a Personal Consumption Expenditures (PCE) index of 2.5% by the end of 2025, with a return to the 2% target anticipated only by the end of 2026.
Inflation’s Resurgence and Economic Outlook
Adding to the complexity, the Consumer Price Index (CPI), a key inflation measure, rebounded in November, reaching 2.7% year-over-year. The PCE index, the fed’s preferred inflation gauge, is set for release on December 20th. Producer prices also climbed to a near two-year high in November,partly attributed to the impact of avian flu,according to the Producer Price Index (PPI).
The Fed’s revised projections anticipate only two more 25-basis-point rate cuts in 2025. Powell’s comments highlight the delicate balancing act: “We are getting very close to the neutral rate,” he said, referring to the interest rate that neither stimulates nor hinders economic growth. This cautious approach stems from the Fed’s revised inflation forecast for 2025,now at 2.5%—a notable upward revision from the 2.1% projected in September.
Despite persistent inflation, the Fed forecasts continued economic growth of 2.1% in 2025, with unemployment remaining low and stable at around 4.3%. This positive outlook, however, is tempered by significant uncertainties.
Uncertainty and the incoming Administration
Powell recently noted that the Fed “could afford to be a little more cautious” given the robust economic activity. governor Michelle Bowman emphasized that inflation risks are ”more significant” than unemployment concerns. She has also suggested that the neutral rate might be higher than initially estimated, potentially near current levels.
The upcoming economic policies of the incoming administration will play a crucial role. The potential for deregulation, immigration policy changes, tax cuts, and increased tariffs could significantly impact the economy, making accurate predictions challenging. A survey of 500 U.S. companies by Resume Templates revealed that 82% anticipate price increases if new tariffs are implemented. The prospect of 25% tariffs on goods from Canada and Mexico, already announced by the incoming president, adds to the uncertainty for American consumers.
Sources: Various news outlets and economic reports.