As the Federal Reserve is set to hold a policy meeting this week, investor expectations about whether it will further cut interest rates remain uncertain. Although recent inflation figures have largely met market expectations, core inflation has yet to return to the Fed's 2% target level, sparking widespread discussion about the future path of monetary policy. According to the latest data, the U.S. CPI inflation rate rose to 2.7% in November, up from 2.6% in October, while the core CPI inflation rate, excluding food and energy, remained at 3.3%, marking the fourth consecutive month without improvement.
Inflation Outlook Unclear, Rate Cut Prospects in Doubt
The biggest challenge for Federal Reserve policymakers is how to respond to this data. Although the latest inflation figures have not exceeded expectations, core inflation has dropped from a high of nearly 7% in 2022 to 3.3%, yet the decline has significantly slowed. The market generally believes that there is no need for further rate cuts in the short term. However, the key question is whether inflation can continue to move toward the Fed's 2% target. Analysts point out that the stagnation in core inflation means inflation may still be influenced by both upward and downward factors in the coming months, making Fed policy adjustments more complex.
It is worth noting that the main inflation indicator the Fed focuses on is the Personal Consumption Expenditures (PCE) rather than the CPI. The PCE inflation rate has nearly reached the 2% target, mainly due to a slowdown in housing cost increases. While rising U.S. rents have been a major factor driving CPI inflation, the slowdown in housing costs may alleviate this pressure and narrow the gap between CPI and PCE.
Tight Labor Market, Complex Policy Adjustments
The U.S. labor market remains tight, with unemployment at historically low levels and wage growth still robust. The latest data shows that real hourly wages in the U.S. increased by 1.3% over the past year, while rising travel and car prices have put pressure on core service sector inflation. Notably, in November, core service sector inflation, excluding housing and energy, rose by 0.3%, continuing to exceed the Fed's target.
Although these data reflect the strength of the U.S. economy, they also suggest that the current policy interest rate does not appear overly restrictive. This makes the question of whether the Fed needs to further cut interest rates more complicated. Additionally, while Fed policymakers typically do not engage much with political factors, President Trump's proposed large-scale tax cuts and new tariff policies could drive up prices, potentially affecting future inflation trends.
Forward Guidance and Data Dependence: Fed Faces Decision Dilemma
The Fed's decision-making framework includes two core principles: "forward guidance" and "data dependence." Forward guidance emphasizes preventing excessive market volatility by clearly communicating policy expectations, ensuring interest rate changes are reflected in market prices in advance. "Data dependence" indicates that the Fed's decisions will be based on the actual trajectory of inflation, which is inherently volatile, with the only constant target being 2%.
The Fed's two strategies can sometimes conflict. Forward guidance emphasizes policy stability, while data dependence emphasizes adjusting policy according to the inflation outlook. Therefore, the Fed sometimes needs to strike a balance between the two. At this meeting, the market generally expects the Fed to prioritize the "data dependence" strategy, temporarily avoiding making too many commitments about future rate cuts.
Conclusion
Overall, the Federal Reserve's monetary policy still faces significant uncertainty. Although recent inflation and labor market data have been relatively strong, core inflation has not retreated effectively, and President Trump's potential trade policies could still impact inflation trends. Therefore, while the market expects the Fed to announce continued rate cuts this week, investors should remain attentive to changes in data over the coming months, especially regarding the still uncertain prospects for further rate cuts in 2025.
