Investors still widely expect the US central bank to cut borrowing costs by a quarter percentage point next week after a new report showed inflation rose in November in line with expectations. But persistent price pressures have also underscored concerns that progress toward the US central bank’s 2% target may be stalling.

Those concerns could prompt officials to rein in the number of rate cuts they anticipate in 2025 as they wait for more confirmation that inflation is on track to reach their goal. Policymakers will release new forecasts and rate projections at the conclusion of their Dec. 17-18 meeting in Washington.

“I think they can safely go ahead and do a 25-basis-point cut in December. The markets are prepared for that,” said Loretta Mester, a former president of the Cleveland Fed. “However, they’ve got to be rethinking about next year, because it does look now that the inflation progress has stalled out a bit.” 

Just three months ago, the Fed kicked off its cutting cycle with an aggressive half-point move driven by growing worries that a cooling US labor market was nearing a dangerous tipping point. A cut next week would be the Fed’s third straight reduction and lower the federal funds rate to a range of 4.25% to 4.5%, a full percentage point below where it stood at the beginning of September.

That’s still well above the 2.9% median estimate submitted by policymakers in September for where they see rates ultimately settling. They’re just not in as much of a hurry to get there.

That’s because, since September, inflation has moved down more slowly than expected and the labor market hasn’t weakened as much as feared. Officials, including Chair Jerome Powell, have responded by signaling they’re prepared to take their time lowering borrowing costs. 

If policymakers were to leave their projections from September unchanged, that would point to four more reductions in 2025, after a December reduction. But many analysts expect the 2025 number will drop because of growing worries over inflation’s stickiness, especially if the committee follows through with a rate cut next week.

“The doves who want the rate cut are going to pay for it with a higher path” in the forecasts, said Conrad DeQuadros, senior economic adviser at Brean Capital LLC. “We will get the cut, but the path going forward will be a much shallower path.”

Investors, based on pricing in fed funds futures, see a December cut followed by two to three additional cuts next year.

Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist, agreed that several officials could reduce the number of cuts they see in 2025.

“It makes sense that they should maybe have less easing in their baseline than in September,” said Coronado. “And then the question then becomes, ‘alright, but what about timing?’”

Stronger data

The November data released Wednesday by the Bureau of Labor Statistics showed core consumer inflation, which excludes volatile food and energy costs, rose by 0.3% for the fourth straight month. From a year ago, it rose 3.3%.

Shelter costs, a source of stubborn inflation, cooled from the previous month. But goods prices excluding food and energy, an area where costs had been falling, climbed 0.3%, the most since May 2023.

Traders reacted by ramping up to about 90% the probability they see of the Fed cutting rates next week, boosting those odds from around 80% prior to the inflation release.

“December looks nailed down now, and the Fed isn’t one of those central banks that likes to surprise the market,” said James Athey, a portfolio manager at Marlborough Investment Management.

Short-term US Treasuries intially rallied sharply before pairing those gains later in the day. Bond bulls had come into the week emboldened given Friday’s job data for November was mixed and made one more cut from the Fed this year seem more likely.

What Bloomberg Economics Says…

“November’s sturdy core CPI reading will inflame worries among the FOMC minority that disinflation has stalled. True, housing-rent inflation finally stepped down — as market rents have long suggested — but goods prices have lost disinflation momentum.”

— Anna Wong and Stuart Paul, economists

Stronger inflation data could also add to questions about whether the neutral rate — the level for borrowing costs that neither slows nor stimulates the economy — is now higher. If the neutral level is now more elevated, that would suggest that interest rates are not putting as much downward pressure on the economy as previously expected.  

Officials do not want interest rates to be so restrictive that they cause damage to the labor market, but they also don’t want to cut so quickly that they risk moving below neutral and reigniting inflation. 

“We can afford to be a little more cautious as we try to find neutral,” Powell said last week.