(Bloomberg) -- Federal Reserve officials capped 2024 with a third-straight interest-rate cut and a strong signal that inflation concerns are back in the fore.
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Chair Jerome Powell put it plainly: The central bank’s year-end inflation projection has “kind of fallen apart.”
Officials now see it taking much longer for inflation to reach their 2% target, which they have missed for nearly four years. As a result, they dialed back expectations for rate cuts next year, and Powell made clear that any adjustments will hinge on further progress in cooling price increases.
The stronger focus on inflation is a significant shift in strategy from September when officials saw labor market softening as the greater risk. But recent data have reignited concerns about inflation stalling above the central bank’s 2% goal — as have policy proposals from President-elect Donald Trump.
“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 just 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. US Treasury markets and stocks tumbled, while the US 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 Wednesday, 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%-4.5%, was a closer call, Powell said. Cleveland Fed President Beth Hammack voted against the action, preferring to hold rates steady.
Inflation Risks
“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 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.