This week, the Federal Reserve's policy meeting is drawing significant attention, with the market generally expecting a 0.25 percentage point cut in the federal funds rate, with over a 90% probability of a rate cut. However, Federal Reserve Chairman Powell might send a "hawkish" signal at the press conference, suggesting that there may be fewer rate cuts in 2025 than expected, and that the possibility of pausing further cuts in January next year is rising.
The core challenge facing the Federal Reserve is the persistent inflation issue. Although inflation has eased recently, the latest data indicates that the path to the 2% target has become increasingly uncertain. Data released last week showed that the core Consumer Price Index (CPI), excluding food and energy, rose by 0.3% month-on-month for four consecutive months, while the Producer Price Index (PPI) also showed momentum exceeding market expectations. This makes it difficult for the core Personal Consumption Expenditure (PCE) Index to quickly return to target levels.
The market generally believes that the Federal Reserve's policy approach might gradually shift from "the timing of rate cuts is just a matter of inflation easing" to "the need to maintain current policy for a longer time." In closed-door meetings, policymakers might discuss maintaining tight conditions for a longer period, even considering the possibility of future rate hikes.
Potential Policy Pause in January, Divided Opinions on Rate Cut Path
As Powell may release policy signals, the market starts to form different expectations for the Federal Open Market Committee (FOMC) meeting in January next year. Some analysts believe the Federal Reserve will "skip" one rate cut and then resume quarterly easing policy through 2025. Others are more cautious, believing the pause might indicate greater uncertainty.
Meanwhile, Powell will continue to emphasize in his statements that the Federal Reserve will not "speculate or assume" the specific impact of new government policies. However, it is foreseeable that Trump's policy mix—increased tariffs, immigration restrictions, and fiscal pressures—could have a short-term inflationary effect, which increases the uncertainty of the policy path.
Inflation Target and Policy Choices: Two Possible Scenarios
Currently, the Federal Reserve faces a critical decision:
- First, to adhere to the current 2% inflation target, continuing to address stubborn inflation through relatively "hawkish" rate cuts, maintaining tight conditions longer than market expectations;
- Second, to implicitly accept a rise in the equilibrium inflation rate, accepting a 3% inflation level, rather than openly abandoning the current target.
Notably, the latter choice does not imply that the Federal Reserve will formally announce a change to the inflation target, but rather delay the target achievement timeframe to flexibly adapt to new situations. This adjustment depends on the effectiveness of U.S. government supply-side policies, corporate pricing behavior, and global economic developments.
Inflation and Economic Data Conflict: The Federal Reserve's Dilemma
Recent conflicting inflation data and robust economic performance further exacerbate the Federal Reserve's policy pressures. Despite positive surprises from economic activity reports, the stubbornness of inflation and loose liquidity conditions present complex challenges for policymakers. Additionally, potential deregulation and supply-side reforms by the new Trump administration could support long-term growth but might amplify short-term inflation risks.
Future Impact: Economic Growth and Market Volatility
Powell and the Federal Reserve's decisions will have profound impacts on U.S. economic growth, financial market stability, and global markets. If the Federal Reserve opts to stick to the 2% target, overly tight policies could pose risks to economic growth. Conversely, accepting the reality of higher inflation might temporarily sustain economic resilience and market health, but long-term inflation expectations must remain cautious.
Amid sustained inflation, strong economy, and policy uncertainty, the Federal Reserve's next move is under close scrutiny. Powell might send clear signals at this week's press conference, indicating a pause in the January meeting, potentially setting the stage for the rate cut path in 2025. How the Federal Reserve adjusts its strategy to address potential inflation risks and policy dilemmas remains a key focus for the market.
