Fed’s Focus Has Returned Firmly to Inflation

“As we think about further cuts, we’re going to be looking for progress on inflation,” Powell said Wednesday during a press conference. “We have been moving sideways on 12-month inflation.”

The median policymaker now sees just a half-percentage point of reductions next year, half of what was expected in September. Markets reacted swiftly and violently to the Fed’s new projected path. U.S. Treasuries markets and stocks tumbled, while the U.S. dollar rallied to the strongest level in more than two years.

Just a few months ago, Powell coaxed the committee to a bell-ringing half-point cut as their first move. With the quarter-point cuts in November and this month, the Fed has reduced borrowing costs by a full percentage point over three meetings, the steepest series of reductions outside of a crisis since 2001. The latest move, which brought the federal funds rate down to a range of 4.25 percent to 4.5 percent, was a closer call, Powell said. Cleveland Fed President Beth Hammack voted against the action, preferring to hold rates steady.

“From here on out, it is going to be much harder to get rate cuts without much further improvement on inflation,” said Conrad Dequadros, senior economic adviser at Brean Capital LLC. “I would imagine that the lack of consensus is probably greater than what the one dissent suggests.”

Fifteen of 19 officials now see a higher risk that inflation will exceed their expectations rather than undershoot them, a massive shift from the three who felt the same back in September. And 14 officials said they see higher uncertainty around their inflation forecast.

Many economists have said Trump’s plans for tax cuts, mass deportations, and fresh tariffs run the risk of stoking inflation. Powell said some people did start to incorporate the proposed policies into their forecasts at the December meeting. “It’s kind of common-sense thinking that when the path is uncertain you go a little bit slower,” Powell said. “It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

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What Bloomberg Economists Say…

“Though Fed Chair Jerome Powell once said officials won’t speculate on the policies of the incoming Trump administration, the sunnier growth and unemployment forecasts in the new Summary of Economic Projections (SEP) suggest most officials did assume the Tax Cuts and Jobs Act—set to expire next year—will be extended. Powell confirmed as much at his news conference.”

— Anna Wong, Stuart Paul, Eliza Winger & Chris Collins

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Officials now expect inflation to hit 2.5 percent at the end of next year, up from the September median of 2.1 percent—and above where they see price growth settling at the end of this year. Policymakers don’t expect to reach their 2 percent goal for inflation until 2027, the updated projections showed.

“The committee is definitely focused on the challenges of inflation for people,” said Patricia Zobel, head of macroeconomic research at Guggenheim Investments and a former senior official at the New York Fed. “And they are committed to the mandate of getting it back down.”

While inflation has cooled so far without much damage to the economy, Powell acknowledged that the surge in the price level is still afflicting American pocketbooks. “People are still feeling high prices,” Powell acknowledged. “The best we can do for them, and that’s who we work for, is to get inflation back down to it’s target.”

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