The Fed Already Has the Inflation It Wanted, But When It Will Start Lowering Rates Is Still a Mystery

The Federal Reserve achieved the inflation it sought. It is still difficult to say when the central bank will start cutting rates.

The Fed’s preferred measure of inflation, a core personal consumption expenditure (core PCE) index that excludes volatile food and energy prices, stood at 2.9% year on year last December, better than expected.

It was the first time since March 2021 that the gauge fell below 3%, long before the central bank launched its most aggressive rate hike campaign since the 1980s.

Even more encouraging for central bankers is that the core PCE inflation rate fell to 1.5% on a three-month annualized basis, its lowest level since late 2020. On a six-month basis, it was 1.9% for the second consecutive month. , Both figures are below the 2% target set by the Fed.

What does the market think?

The question now is whether the data is enough to justify a rate cut that is in line with the expectations of investors, who started the year predicting that the first cut would occur in March.

Policymakers are pushing back against that optimism, warning that they need more data to be sure about price changes. Some have also suggested that this may not happen until the second half of the year.

Traders, as of Friday morning, are estimating a 46% chance that the US central bank will cut rates at its March meeting. This represents a decrease from nearly 56% last week and much less than 88% last month.

Investors still expect, by a small margin, the first cut to come in May, and the probability of that happening is now 51%.

The economy looks strong

As inflation continues to decline, stronger than expected economic growth could support the case for postponing any cuts beyond March.

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Preliminary estimates of US gross domestic product (GDP) for the fourth quarter of 2023 released on Thursday showed that the economy grew at an annual rate of 3.3% during the period. This is higher than the forecast of analysts who had kept the figure at 2%.

If economic growth continues to move surprisingly upward and inflation rises again, the Fed may be forced to keep rates at current levels for a longer period of time. It last raised rates in July, reaching their highest level in 22 years.

During the Fed’s December press conference, Fed Chairman Jay Powell said that the central bank’s chances of raising rates are extreme and that it will turn its attention to cutting rates in the future.

He also told Yahoo Finance’s Jennifer Schoenberger that the Fed would want to “ease restrictions on the economy” long before inflation reaches 2%.

At that December meeting, Fed officials predicted three cuts this year, without saying when they might happen.

written article originally in english By jennifer schoenberger, Senior reporter for Yahoo Finance.

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