Fed Latest Update: Officials React to US Inflation Report

Barkin’s Comments:

• Inflation is trending toward the 2% target.
• Price pressures are easing steadily.
• There are signs that inflation remains either unsustainable in some areas or continues to align with the target.
• The December unemployment rate was encouraging.
• The labor market appears to have stabilized.
• There’s little evidence to suggest that the economy is weakening.
• The economy isn’t overheating; demand is stable but not expanding significantly.
• Current interest rates are comparable to levels seen in the early 2000s, a period without significant business constraints.
• Long-term rates currently have no major impact on Fed policy.

Williams’ Comments:

• The deflation process will persist but could be uneven.
• Improved supply-demand balance has facilitated rate cuts.
• The balance sheet contraction is proceeding smoothly.
• Economic growth is projected to slow to 2% this year.
• Unemployment is expected to stay within the 4-4.25% range.
• Inflation is anticipated to return to 2% over the coming years.
• Housing-related inflationary pressures are subsiding.
• The economy has returned to equilibrium.
• Inflation expectations remain stable.
• Rising bond yields do not reflect a significant change in inflation expectations.
• An increase in term premiums is influencing higher bond yields.
• No specific forecast for when the balance sheet contraction will conclude.

Goolsbee’s Comments:

• Progress on inflation continues.
• Optimistic about achieving a soft landing by 2025.
• The latest CPI report is a mix of encouraging and discouraging factors.
• The Fed is confident inflation will reach the 2% target as promised.

All officials emphasized that future uncertainties are mainly tied to the policies of the new president and Congress. They avoided predictions regarding how tariffs or tax policies might influence the Fed’s actions.

Goldman Sachs’ Analysis:

• Analysts believe the lower-than-expected core CPI reading reduces concerns about inflation rebounding.
• While this report alone may not prompt a rate cut in January, it supports the idea that the Fed’s current easing cycle remains intact.
• Given the favorable labor market, the Fed has the luxury of waiting for further positive inflation data before considering more rate cuts.
• They predict annual core inflation will fall to 2.7% by the end of 2025.

Summary of the Market Reaction:

Both officials and Goldman analysts shared a positive outlook following the latest market decisions. They reiterated that progress toward inflation goals may face challenges, but overall, the data remains reassuring. However, the market slightly adjusted its sentiment yesterday, reflecting lingering caution.

According to the CME FedWatch Tool:

• The likelihood of a rate cut in May stands at nearly 50/50.
• The probability of a second rate cut in December has dropped to 46.48%.

Previously, a cut in May and another in December were more confidently anticipated.

Potential Concerns:

Market hesitation may stem from:

• The CPI report not being entirely strong.
• New sanctions against Russia.
• Ongoing Middle East conflicts.
• Efforts by the outgoing Democratic Party to restrict U.S. oil production expansion.

These factors could drive energy prices higher, renewing inflationary pressures.

Market Developments:

• The USD has regained some ground in the currency market.
• Bitcoin is slightly correcting after today’s opening.
• The S&P 500, while still growing, has stalled near the 50-day moving average.

What’s Next?

The strategy remains the same:

• Look for optimal entry points.
• Stay informed with the latest news.
• Practice sound money management.

We’ll continue to share updates and insights in upcoming posts.

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