The Fed is likely on track to cut interest rates again next week after new inflation readings line up with Wall Street expectations, but some central bank watchers believe the Fed will continue to do so due to stubborn upward price pressures. We believe this suggests a more cautious approach towards 2025.
“I think inflation will slow down” in 2025 as inflation continues to show signs of persistence, former Cleveland Fed President Loretta Mester told Yahoo Finance.
The former Fed policymaker still expects a rate cut next week, but added that his prior prediction of four cuts next year “needs to be reconsidered.”
Two or three cuts in 2025 “seems right to me.”
Greg Daco, chief economist at EY, told Yahoo Finance that the market is “very confident the Fed will proceed with a 25 basis point rate cut on Dec. 18,” but as inflation continues “I think the odds are similar to a coin flip,” he said. Very sticky.
Darko said he expects the Fed to cut rates next week, but expects that to be accompanied by a signal that the next two cuts will be “more spaced out” in 2025.
He added that investors should expect a pause before the next round of cuts as policymakers adjust to the new Trump administration’s policies. Some expect these policies to act as upward pressure on inflation.
“The Fed will want to be cautious,” Darko said.
The Consumer Price Index (CPI) rose 2.7% year over year in November, up slightly from the 2.6% annual price increase in October, according to the latest inflation data from the Bureau of Labor Statistics released Wednesday. The annual increase was in line with economists’ expectations.
On a “core” basis, which excludes volatile food and gas prices, prices rose 3.3% year-on-year in November for the fourth straight month.
Traders reacted to the new indicator by increasing their bets for a Fed rate cut next week, pushing the odds to 96%. The Fed has already cut interest rates twice this fall.
Earlier this month, Fed Chairman Jay Powell gave no indication of what the central bank would do at its final policy meeting of the year. But he also said the economy is stronger than the Fed thought at the beginning of the fall, so “we can afford to be a little more cautious.”
Read more: How Fed Rate Cuts Affect Bank Accounts, CDs, Loans, and Credit Cards
The CPI measurement is one of the last data sets to consider before Fed policymakers gather in Washington, D.C., next week for their final meeting of 2024.
It will also closely monitor the Producer Price Index (PPI), a measure of wholesale inflation, which will be released on Thursday.
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