Fed Cuts Interest Rates Amidst Rising Inflation Concerns

Fed Cuts Interest Rates

The Federal Reserve cut interest rates by a quarter of a percentage point Wednesday, in line with market expectations, even as inflation has reaccelerated over the past two months. Fed officials have been trying to find the right tempo for rate cuts since starting them in September with a sizable half-point reduction, and Wednesday’s cut — the third in a row — shows them pressing ahead with their strategy despite some underlying strength in labor and price data.

Current Economic Context

The Fed is now projecting two cuts for next year as opposed to four. “As for additional cuts, we’re going to be looking for further progress on inflation as well as continued strength in the labor market,” Fed Chair Jerome Powell said Wednesday.

Employment and Price Growth

• The economy added a robust 227,000 jobs in November after the labor market stalled out in October.
• Prices in the consumer price index (CPI) have jumped to a 2.7 percent annual increase from 2.6 percent in October.
• Core consumer prices stayed even in November at a 3.3 percent annual increase.

Market Perspectives

Investors expressed concerns Wednesday that continued steady cuts from the Fed might not be in the cards if prices trend upwards. “If inflation continues to stay above target in the new year, the markets may be too optimistic on how many cuts the Fed may deliver,” said Joe Gaffoglio, CEO of Mutual of America Capital Management, in a Wednesday commentary.

Housing Sector Inflation

Cooling prices in the services sector, especially in housing, may be bolstering the Fed’s confidence on cuts. Housing services inflation moderated to a 4.1 percent annual increase.

Future Expectations

December economic projections from the Fed showed hotter performance expectations across the board, with GDP forecasts increasing and inflation expectations rising. Some economists suggested the Fed may have made a mistake. “I don't know why the Fed cut. Progress on inflation is at least temporarily stalled,” Jason Furman commented.

Monetary Policy Navigation

Powell noted challenges in predicting trends ahead, describing the current situation as navigating in the dark.