The Bloomberg editorial board points out that the Federal Reserve's policy rate may need to be further lowered in 2025, but it is too early to draw conclusions now. Here are the views of the editorial board.
Investors believe that the recent inflation data has given the green light for the Federal Reserve to cut short-term rates by 25 basis points again. When the Federal Reserve's policymakers meet this week, it would be wise to say, 'Don't be too hasty.' A further rate cut may be needed in 2025, but pausing now makes more sense.
As of November, the CPI inflation rate rose to 2.7%, up from 2.6% in October. Excluding food and energy prices, the so-called core CPI inflation rate has remained at 3.3% for the fourth consecutive month. The market welcomed this data, believing it largely met expectations and concluding that there was no need to adjust predictions for another rate cut.
But this is not the correct test standard. The issue is not whether the latest numbers are a bad surprise, but whether inflation is on track to return to its 2% target.
Currently, this point does not seem very clear. The trend of core inflation decreasing from a peak of nearly 7% in 2022 appears to have stalled, and the rate of price increases remains slightly above the Federal Reserve's target. It is certain that a variety of factors will exert both upward and downward pressure in the coming months.
It is also worth noting that the Federal Reserve primarily focuses on personal consumption expenditures (PCE) as a measure of inflation, rather than CPI. The personal consumption expenditures inflation rate is approaching the 2% target—because it is less affected by housing costs, while rising rents have been a major factor keeping CPI inflation elevated. Recently, housing costs have been slowing, which should narrow the gap between the two indicators.
On the other hand, the U.S. labor market remains tight. The unemployment rate is at a historical low, and the latest data shows that real hourly wages are 1.3% higher than a year ago. Travel costs are rising, and car prices are also increasing. In November, core services inflation, excluding housing and energy, rose by 0.3%, again exceeding the target requirement.
Overall, these numbers do not suggest that the current policy rate is too tight. Moreover, although the Federal Reserve's policymakers may be reluctant to discuss this topic, they will realize that the incoming President Trump is proposing significant new tariffs and tax cuts, both of which will drive up prices.
The way the Federal Reserve communicates with investors makes its job more challenging. It tends to favor 'forward guidance' and 'data dependence.' The former emphasizes the importance of stable policy expectations: the Federal Reserve explains its thoughts so that changes in interest rates can be reflected in market prices in advance, rather than appearing suddenly. To this end, it regularly publishes 'estimates' of where policymakers believe interest rates should be in the coming months.
In contrast, the reliance on data emphasizes uncertainty: future interest rates will depend on the outlook for inflation, which is volatile, with the only fixed point being the 2% target.
The Federal Reserve sometimes adjusts the emphasis between these two approaches but generally tries to benefit from both—stabilizing interest rate expectations while paying attention to changes in price information. However, when the two conflict, it must make a choice. This week will be a good time to remind investors to 'let the data speak.'
Article reposted from: Jinshi Data