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Will the Fed Cut Rates as Inflation Progress Slows?

12.12.2024 9:30 2 min. read Alexander Zdravkov
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Will the Fed Cut Rates as Inflation Progress Slows?

Former Cleveland Fed President Loretta Mester suggests that the Federal Reserve may need to rethink its interest rate strategy in light of recent inflation developments.

Discussing the latest Consumer Price Index (CPI) report, Mester acknowledged that it met expectations but raised concerns about a stall in the progress of inflation. This pause could have significant implications for the Fed’s upcoming decisions.

Mester expressed concern that inflation has made minimal progress in recent months, noting that this could affect the central bank’s plans. According to her, despite earlier expectations for a reduction in inflation, recent data signals that further tightening could be needed to control inflationary pressures.

The Federal Reserve’s September forecast had predicted a rate cut by the end of the year, followed by additional cuts in 2024. However, Mester believes this outlook may no longer be applicable, given ongoing economic growth and persistent inflation. She called for a reassessment of the Fed’s monetary policy for the upcoming year, noting that the risks tied to employment are now less significant, allowing the focus to shift to inflation control.

Mester also pointed out the importance of base effects and projections for early 2025, which might help ease inflation during the first quarter. However, she cautioned that inflation has remained volatile, suggesting that a more restrictive policy could be necessary to meet the Fed’s targets.

While the Fed initially projected multiple rate cuts for 2025, Mester now expects that number to decrease, with just two or three cuts more likely. She indicated that the Fed may implement a rate cut in December, but it would be crucial to pause in January for a thorough evaluation of the economic situation. Mester emphasized that the Fed’s actions will likely need to be more aggressive than previously expected to bring inflation down effectively.

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