Inflation Surge: A Rate Cut from the Fed, a Mistake?

Inflation has been on the rise for the past two months, sparking debate on whether an interest rate cut from the Federal Reserve (Fed) would be a mistake. The Fed is expected to cut its benchmark rate by a quarter-point to about 4.3% when its meeting ends Wednesday, bringing the rate a full point below its four-decade high reached in July 2023. However, while inflation has dropped far below its peak of 9.1% in mid-2022, it remains stubbornly above the Fed's 2% target. This has led economists to expect fewer rate cuts next year than previously anticipated.

The recent rise in inflation has raised concerns about the Fed's decision to cut interest rates. Inflation has now risen for two months, with the consumer price index (CPI) increasing by 0.1% in October and 0.3% in November. This comes after a period of relatively low inflation, with the CPI remaining unchanged in September. The rise in inflation has been driven by increases in the prices of goods and services, particularly energy and food. However, the core CPI, which excludes volatile food and energy prices, has remained relatively stable, increasing by 0.2% in November. This suggests that the recent rise in inflation may be temporary and not indicative of a broader trend.

An interest rate cut from the Fed could potentially exacerbate inflation by encouraging borrowing and spending, which could further fuel price increases. However, it could also stimulate economic growth by making loans cheaper, which could lead to increased consumer and business spending. The key is to find the right balance between controlling inflation and promoting economic growth.

The recent rise in inflation has raised concerns about the Fed's decision to cut interest rates. Inflation has now risen for two months, with the consumer price index (CPI) increasing by 0.1% in October and 0.3% in November. This comes after a period of relatively low inflation, with the CPI remaining unchanged in September. The rise in inflation has been driven by increases in the prices of goods and services, particularly energy and food. However, the core CPI, which excludes volatile food and energy prices, has remained relatively stable, increasing by 0.2% in November. This suggests that the recent rise in inflation may be temporary and not indicative of a broader trend.

An interest rate cut from the Fed could potentially exacerbate inflation by encouraging borrowing and spending, which could further fuel price increases. However, it could also stimulate economic growth by making loans cheaper, which could lead to increased consumer and business spending. The key is to find the right balance between controlling inflation and promoting economic growth.

The Fed's decision to cut interest rates this week is expected to signal a shift to a more gradual approach to rate cuts in 2025. Economists now expect just two or three Fed rate cuts next year, down from the four cuts they had envisioned in September. Wall Street traders foresee even fewer: Just two cuts, according to futures prices.

Fewer rate cuts by the Fed would mean that households and businesses would continue to face loan rates, notably for home mortgages, that would far exceed their levels before inflation began surging more than three years ago. Some economists question whether the Fed even needs to cut this week. Inflation, excluding volatile food and energy costs, has been stuck at an annual rate of about 2.8% since March. A year ago, the policymakers had forecast that that figure would have fallen to 2.4% by now and that they'd have cut their key rate by three-quarters of a point. Instead, inflation has become stuck at a higher level, yet the Fed has lowered its benchmark rate by a full point.

Fed officials, including Chair Jerome Powell, have said they still foresee inflation heading lower, however slowly, while their key rate is still high enough to restrain growth. As a result, reducing rates this week is more akin to letting up on a brake than stepping on an accelerator. The potential for major changes to tax, spending, and immigration policies under President-elect Donald Trump is another reason for the Fed to take a more cautious approach. Former Fed economists say the central bank's staff has likely begun factoring the effects of Trump's proposed corporate tax cuts into their economic analyses, but not his proposed tariffs or deportations, because those two policies are too difficult to assess without details.

Tara Sinclair, an economist at George Washington University who is a former Treasury Department official, suggested that the uncertainty surrounding whether Trump's policy changes will keep inflation elevated — and necessitating higher rates — could also lead the Fed to cut rates more gradually, if at all. “It seems easier to explain not cutting than to find themselves in a position where they would have to raise rates in this political environment,” Sinclair said.

Powell has said the Fed is seeking to lower its rate to the so-called “neutral” level. Yet there is wide disagreement among the policymakers about how high that rate is. Many economists peg it at 3% to 3.5%. Som