The Fed avoided a recession in 2024. But it couldn’t shake inflation.

By April Powell made it clear that he wouldn’t be meeting Wall Street expectations and reverted explicitly to a higher-for-longer stance, saying “it’s likely to take longer than expected to achieve that confidence” inflation is falling to 2%.

Investors got excited about cuts again in the summer with new signs that inflation was cooling again. The pressure for cuts became louder as the labor market cooled, with a weaker-than-expected July jobs report reinforcing those fears.

Some argued the Fed had waited too long and was behind the curve.

Powell made the pivot Wall Street wanted during a speech at Jackson Hole, Wyo., in late August, saying “the time has come” for the central bank to adjust its monetary policy.

Inflation appeared to be fading as a worry, replaced by the job market. Powell said the Fed did not “seek or welcome further cooling in labor market conditions” and that the Fed had “ample room” to lower rates sitting at 23-year highs.

Powell made good on this promise less than a month later when the Fed pulled the trigger on its first rate cut since 2020. It was a jumbo-sized, 50 basis point reduction, and Fed officials predicted two more smaller cuts in 2024 followed by another four in 2025.

“We don’t think we are behind,” he said on Sept. 18, but “you can take this as a sign of our commitment not to get behind.”

There were other signs, however, that not all Fed officials were convinced the Fed had vanquished inflation.

In fact, the jumbo-sized September rate cut prompted the first dissent from a voting member of the Fed’s Federal Open Market Committee in two years.

Fed governor Michelle Bowman said she preferred to cut rates by a smaller 25 basis points because the Fed had not achieved its inflation goal.

“I see the risk that the committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate,” Bowman said in a statement.

She also said she worried that a 50 basis point reduction would send the signal that “the committee sees some fragility or greater downside risks to the economy.”

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No Fed governor had dissented on a rate decision since 2005.

Bowman’s dissent wouldn’t be the last as the Fed cut rates in three consecutive meetings while inflation began moving sideways.

Beth Hammack, the president of the Cleveland Fed, voted against the last rate cut of the year in December because in her view “there is more work to do on inflation,” noting that she preferred to pause given the strength of the US economy.

“Based on my estimate that monetary policy is not far from a neutral stance, I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2% objective.”

Things will likely only get more complicated for Fed officials in 2025 as Trump takes office. The President-elect has proposed extending tax cuts, and in some cases, lowering taxes while also affixing tariffs.

Powell said some members of the Fed did take a very preliminary step to start to incorporate “highly conditional estimates of economic effects of policies into their forecast” at the Dec. 18 meeting.

That suggests that some policymakers did account for potential shifts in regulation, immigration, trade, and tax policy under the new Trump administration.

Mary Daly, president of the San Francisco Fed, says she sees the Fed’s recalibration process as “completed.”

“We are now back to the time when we can make our decisions more slowly…using the data to affect the incoming forecast and determine how many rate cuts we’ll ultimately do next year,” she told Yahoo Finance.

She added that the Fed is not “done cutting rates,” just adjusting at a slower pace.

But Daly also didn’t rule out a rate hike in 2025.

“I never rule out anything honestly because that’s a recipe for being behind or [making] mistakes,” Daly said.

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