U.S. Inflation Clouds Fed’s 2025 Rate-Cut Path: Is a Slowdown Ahead?

This week's October inflation data suggests that the Federal Reserve may face a challenging path to reaching its 2% inflation target, possibly impacting rate cuts planned for 2025.

On Wednesday, the core Consumer Price Index (CPI), excluding food and energy, showed a 3.3% annual increase for the third month in a row. The next day, core Producer Price Index (PPI) data showed an increase of 3.1%—up from 2.8% in September, exceeding predictions.

These figures reinforce the idea of persistent inflation, but markets still anticipate a December rate cut, with the CME FedWatch Tool indicating nearly 80% confidence in a 25-basis-point reduction. However, this steady inflation could lead the Fed to revise its 2025 Summary of Economic Projections (SEP), which currently anticipates four rate cuts totaling one percentage point.

Nationwide’s economist Oren Klachkin noted that while the Fed maintains an easing stance, it might adopt a slower approach, projecting a 75-basis-point cut in 2025 but cautioning that the pace could slow. Wolfe Research’s Stephanie Roth echoed this, suggesting that rate cuts next year may be more gradual.

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The market’s outlook has shifted over the past two months. While the Fed’s half-point rate cut in September initially pointed toward a 3% federal funds rate by 2025’s end, current projections suggest 80 basis points less easing next year. This has contributed to a rise in bond yields, with the 10-year Treasury yield gaining 80 basis points since September. Despite this increase, stocks have shown resilience, approaching record highs.

Economists often look at CPI and Producer Price Index (PPI) data to anticipate the core Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure. Stephen Juneau, a U.S. economist at Bank of America, expects this PCE report, due in late November, to reflect a 2.8% rise in October, slightly higher than September’s 2.7%.

Juneau highlighted that these results may cause concern for the Fed’s inflation objectives but urged that market reaction should remain measured. He pointed out that some inflation drivers, such as financial services and airfare, are likely temporary, while inflation expectations are stable, and the labor market is no longer a major inflation concern.

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Still, Juneau and other economists believe the recent data suggests the Fed might opt for a slower rate-cutting path, given steady economic activity and persistent inflationary pressures.

Kosta Gushterov