The Final Track: The Fed signs off on the year with a rate cut
The Final Track: The Fed signs off on the year with a rate cut
Order a pizza and that’s exactly what shows up. Pull into a gas station, swipe, and you’ve got a full tank. Sometimes things are exactly as expected.
The Fed was no different today, delivering a 25-basis-point (0.25%) rate cut, exactly as the market expected. The decision follows 2 previous cuts leading to a 1% lower Fed funds rate from peak. With inflation (CPI) sitting at a stubborn 2.7% year-over-year in November, after peaking in July 2023 at 9% and the labor market showing some slowing but still stable, the Fed’s next moves are still part of the discussion.
The Inflation Puzzle If you annualize the most recent three-month trend, core inflation would sit at 3.7%. This persistence suggests the Fed needs to tread carefully with future cuts to avoid risking an inflation resurgence (which the market didn’t like today).
Yet inflation expectations may matter more than Fed action now. This is because they are more than just forecasts—they drive behavior:
If businesses expect higher inflation, they may preemptively raise prices.
If workers anticipate rising inflation, they may push for higher wages to protect their purchasing power. In some points in history, this elevated inflation.
So far, the Fed has done a good job anchoring expectations. Short-term and long-term inflation expectations have remained relatively stable (see below), outside of the spike we saw in 2022 and early 2023. But looking ahead, things like impending tariffs, deregulation, and fiscal spending could cause expectations to drift higher. If that happens, managing inflation will become far more challenging for the Fed.
The market’s expectations of 2024 Fed rates have been up, down, and then up again (see the left chart below). Last week, I forecasted a Fed Funds rate of 4% by the end of 2025 (2 cuts), which is where consensus has now moved to, post the Fed meeting today, up from three just yesterday (see chart below on the right). However, it's important to note these have been climbing since October.
The Fed’s rate cutting cycle is important in navigating the delicate balance between supporting economic growth and keeping inflation under control. The Fed’s ability to anchor expectations will be critical. With projections now aligned for multiple cuts next year, the path forward depends on how inflation trends, fiscal policy unfolds, and economic conditions evolve. For now, diligent observation—and Powell’s data dependent stance—remains the name of the game.