In quarterly economic projections due to be released at the end of a two-day meeting, US central bankers are still likely to pencil in at least a couple of rate cuts by the end of next year, as they seek to strike the right balance between policy that’s restrictive enough to slow spending and hiring but not so tight that it sends them into a tailspin.
Fed chief Jerome Powell, however, is expected in a press conference to emphasise that any cuts in borrowing costs are contingent on further improvement on inflation.
On Wednesday, shortly before Fed officials convened for their final day of policy deliberations for the year, the central bank got just that, with the November read on producer prices signalling inflation is dropping faster than they had expected just three months ago.
“It will be hard for Powell to ignore it,” Karim Basta, chief economist at III Capital Management, said of the PPI data, which he estimated puts the Fed’s core inflation measure for the most recent three months exactly at its 2% goal. Though the data on Wednesday suggested he could take the moment to declare victory and look ahead to a “soft landing” next year, most analysts think he’ll skip a celebration.
“Powell will have to walk a fine line by recognising the ground gained towards the normalisation of the economy while pushing back on the idea of early rate cuts,” and even warn that the Fed could yet raise rates again if needed, TD Securities analysts wrote as the Fed meeting got underway on Tuesday. And, indeed, the economy has normalised a lot. Inflation by the Fed’s preferred measure, the personal consumption expenditures price index, dropped to 3% in the latest reading, from more than 7% at its peak in the summer of 2022.
The unemployment rate in November fell to 3.7%, barely above where it was when the Fed began raising interest rates from the near-zero level in March 2022. Fed will give their views on where inflation, unemployment and GDP are likely to be in coming years as part of the projections. reuters