Inflation isn't cooling but the Fed will likely cut rates anyway
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The Fed wants to avoid surprises
Economists and market commentators across the board expect the Federal Reserve to lower interest rates by 25 basis points on December 18, yet it’s difficult to decipher whether recent economic data justify the move.
Putting aside the forecasts for November inflation, the last handful of reports have underscored just how hard it is to cool a hot economy.
“The Fed has cut the federal funds rate more than enough,” strategists from Yardeni Research said Tuesday.
Indeed, consumer prices and personal consumption expenditures remain above the Fed’s stated target of 2%.
The final CPI report of the year is also seen moving higher, not lower.
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Meanwhile, the November employment report suggests the labor market remains relatively robust.
“With both sides of the Fed’s dual mandate (stable prices and full employment) heating up, it’s increasingly likely that the Fed has cut the federal funds rate by too much, too soon,” said Yardeni’s chief markets strategist Eric Wallerstein .
Notably, a Monday survey from the Federal Reserve Bank of New York showed that consumers don’t expect inflation to fall to 2% for at least the next three years.
All the while, traders have steadily ramped up their bets for a December rate cut, with odds for a quarter-point cut jumping from 72% to 86% over the last week, according to CME data.
Two questions come to mind as the Fed prepares to lower rates into the 4.25-4.5% range:
Broadly speaking, the central bank lowers interest rates to stimulate the economy during periods of sluggish spending and weak economic activity.
Conversely, when consumer spending ramps up and inflation accelerates, the Fed raises rates to curb excessive price growth.
In this instance, however, the Fed’s next move could very well be driven by its aversion to surprising markets.
Feedback or thoughts? Leave a comment below!
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President and CEO @ Commodity Capitol IBC | JD, New Business Development
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Chief Markets Strategist at Yardeni Research, Inc.
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Assistant Vice President, Wealth Management Associate
1wVery helpful