Fed Whisperer: Inflation Remains Strong, But Not Enough to Disrupt Fed’s Rate Cut Plan in December

Despite persistent inflation pressures, the Federal Reserve appears determined to proceed with its planned rate cuts in December 2025. Recent data underscores a resilient labor market and moderating price growth, but core inflation remains elevated enough to test the central bank’s resolve. Analysts suggest the Fed’s December meeting will deliver a 25-basis-point reduction, aligning with its “higher-for-longer” strategy while balancing risks from trade policies and fiscal uncertainty.

Inflation: Progress, But Not Yet Victory

The latest Consumer Price Index (CPI) data for March 2025 revealed a 0.1% monthly decline in core inflation (excluding food and energy), bringing the annual rate to 2.8%. While this marks the smallest 12-month increase since March 2021, it remains stubbornly above the Fed’s 2% target. The headline CPI rose 2.4% year-over-year, down from 2.8% in February, driven by falling energy costs. However, services-sector inflation—particularly housing, healthcare, and wages—remains elevated at 3.7%–4.2%, complicating the Fed’s path.

The pending April CPI release (scheduled for May 13) could offer clarity, but economists caution that recent tariff hikes on Chinese imports and ongoing supply-chain bottlenecks may keep prices elevated. “Tariffs are acting like a tax on consumers,” noted Deloitte’s analysis, estimating they could add 0.5–1 percentage point to annual inflation.

Fed’s Delicate Balancing Act

The Fed’s December 2024 projections signaled only 50 basis points of rate cuts for 2025, halving its earlier forecast. This cautious stance reflected concerns over persistent core inflation and a labor market that, while cooling, remains tight: unemployment stood at 4.2% in March, with prime-age labor force participation exceeding pre-pandemic levels.

Federal Reserve Chair Jerome Powell emphasized the central bank’s dual mandate in March 2025, stating, “We’ll ease policy accordingly if labor markets weaken or inflation declines faster than expected.” The March meeting held rates steady at 4.25%–4.5%, but the Fed’s “dot plot” indicated a median expectation of two 25-bps cuts by year-end—aligning with its December projections.

Market Sentiment and Analyst Forecasts

Markets have priced in a 75% probability of a December cut, but analysts remain split. Morningstar’s projections suggest three cuts in 2025, arguing that slowing wage growth and a softening housing market will force the Fed’s hand. Conversely, Goldman Sachs warns that aggressive tariff policies could delay easing, citing a 40% risk of recession in 2026.

The Fed’s adjustment of its quantitative tightening (QT) program—reducing Treasury runoff to $5 billion monthly—signals a pivot toward liquidity support. Yet dissent persists: Fed Governor Christopher Waller argued for maintaining QT’s pace, underscoring internal divisions.

Risks on the Horizon

The Fed faces two critical uncertainties:
1. Trade Policy: President Trump’s planned tariffs on autos and pharmaceuticals could reignite inflation.
2. Debt Ceiling Politics: A potential government shutdown could disrupt economic activity.

Despite these risks, the Fed’s data-dependent approach leans toward gradual easing. “The path is narrow, but the Fed’s credibility hinges on demonstrating flexibility,” said U.S. Bank’s Rob Haworth.

Conclusion: Rate Cuts Ahead, but Caution Remains

While inflation remains above target, the Fed’s December rate cut appears all but certain. The central bank’s projections, labor market resilience, and geopolitical risks suggest two 25-bps reductions in 2025—likely culminating in a December move. However, markets should prepare for volatility: a May CPI surprise or tariff escalation could shift expectations.

The Fed’s “higher-for-longer” mantra implies rates will stay above neutral (estimated at 2.5%) until 2026. Investors betting on aggressive easing may be disappointed, but the Fed’s cautious calculus aims to avoid repeating past mistakes. As Powell put it, “Monetary policy is not on autopilot.” For now, the whisperers agree: cuts will come, but inflation’s grip ensures they’ll be measured.