Fed Whisperer: Inflation's Persistence Won't Derail December Rate Cut.

As the Federal Reserve (Fed) prepares for its December meeting, inflation remains a persistent concern, but not enough to disrupt the central bank's plans for an interest rate cut. Despite a slight uptick in inflation expectations, the Fed is expected to proceed with a quarter-point rate cut, bringing the federal funds rate to a range of 4.25% to 4.5%. This decision is supported by a combination of factors, including a strong labor market, a slowing economy, and the Fed's commitment to its dual mandate of maximum employment and stable prices.



The Fed's latest Summary of Economic Projections (SEP) shows that officials expect the federal funds rate to fall to a midpoint of 3.9% by the end of 2025, equivalent to a target range of 3.75% to 4%. This projection suggests that the Fed is on track to deliver two more quarter-point rate cuts in 2025, a slower pace than previously forecast. The Fed's Dot Plot, which illustrates each policymaker's projected path for interest rates, indicates that 14 of 19 officials penciled in two quarter-point rate cuts or less in 2025, while only five members projected more than two rate cuts next year.

The Fed's decision to proceed with a rate cut in December is supported by a strong labor market, with the unemployment rate at 4.2% and hiring remaining solid. However, the Fed is also aware of the risks posed by a slowing economy and the potential for a recession. In its statement, the Fed acknowledged the need to be more cautious in considering further adjustments to its policy rate, indicating a more data-dependent approach to future rate cuts.



Inflation expectations have increased slightly, with projections for headline and core Personal Consumption Expenditures (PCE) inflation hiked to 2.4% and 2.5% in 2025, respectively. However, the Fed remains committed to its 2% inflation target and is expected to continue monitoring inflation data closely. The Fed's cautious approach to rate cuts, as indicated by the Dot Plot and the language in its statement, suggests that the central bank is prepared to adjust its policy as needed to maintain its dual mandate.

In conclusion, while inflation remains a persistent concern, the Fed is expected to proceed with a quarter-point rate cut in December. The Fed's decision is supported by a strong labor market, a slowing economy, and the central bank's commitment to its dual mandate. The Fed's cautious approach to rate cuts, as indicated by the Dot Plot and the language in its statement, suggests that the central bank is prepared to adjust its policy as needed to maintain its dual mandate. As the Fed continues to monitor economic data and inflation expectations, investors should remain attentive to any changes in the central bank's policy outlook.