Federal Reserve in Serious Trouble: "Inflation Projection Has Fallen Apart"

Summary

The Federal Reserve has revised its 2025 interest rate cut projections from four to two, citing higher-than-expected inflation risks. Despite this, Jerome Powell remains confident in the economic outlook, asserting that inflation has come down significantly. Reporters questioned the logic of cutting rates with inflation still a concern, but Powell emphasized the Fed’s data-driven approach. While the labor market has improved, the initial narrative of cutting rates to protect jobs has shifted. Powell remains cautious, prioritizing progress on inflation and a solid labor market before further rate cuts.

Takeaways

• 😀 The Federal Reserve initially projected four interest rate cuts in 2025 but revised it down to two due to higher-than-expected inflation risks.
• 😀 Powell acknowledged that inflation has underperformed relative to expectations, but still expects rate cuts in 2025, raising questions about the consistency of their reasoning.
• 😀 Despite higher inflation risks, Powell insists that rates are 'too high' and 'too restrictive,' yet doesn't clearly explain why these cuts are necessary given inflation concerns.
• 😀 Inflation is projected to decline to between 2.5% and 2.7% in 2025, but the core inflation forecast has been revised upward, complicating the Fed's rate-cutting strategy.
• 😀 Powell's answers regarding why the Fed plans to cut rates despite inflation risks remain vague, leaving the press unsatisfied and the narrative unclear.
• 😀 The labor market, once a major concern for rate cuts, has stabilized. Powell notes that job creation remains steady, and unemployment rates are not alarming, reducing concerns over further deterioration.
• 😀 The initial narrative that rate cuts were needed to protect the labor market is now downplayed, as the labor market has improved, making rate cuts seem less urgent.
• 😀 Powell expresses confidence in the U.S. economy's future, suggesting that 2025 will be a good year, but his optimism contrasts with the ongoing inflation risks.
• 😀 Despite Powell's optimism, the Federal Reserve’s communications have left many questions unanswered, especially regarding the real reasons for their rate cuts given current inflation levels.
• 😀 The Federal Reserve's strategy appears reactive rather than proactive, adjusting policy based on shifting economic data rather than adhering to a clear, long-term plan.

Q & A

Why did the Federal Reserve initially plan to cut interest rates four times in 2025?

The Federal Reserve initially projected to cut rates four times in 2025 to address a slowing economy and to manage inflation, aiming to bring the economy into a more stable state after raising rates significantly in previous years.

What led the Federal Reserve to revise its interest rate cut projection down from four to two cuts?

The Federal Reserve revised its interest rate cut projection from four to two cuts due to higher-than-expected inflation, which has been more persistent than anticipated. Inflation risk remains elevated, which has made the Fed more cautious about making aggressive rate cuts.

What did Jerome Powell say about the progress on inflation and its implications for future rate cuts?

Jerome Powell acknowledged that while inflation has decreased from previous levels, the progress has stalled. The Federal Reserve wants to see more sustained progress in reducing inflation before considering further rate cuts.

Why are some people questioning the Fed's decision to cut rates if inflation risks remain high?

The skepticism arises because cutting interest rates typically stimulates demand, which could potentially worsen inflation. Given that inflation is still higher than desired, many are questioning the logic of cutting rates at all.

How did Powell respond to repeated questions about why the Fed is planning rate cuts despite high inflation risks?

Powell's response to these questions was that the Federal Reserve believes interest rates are currently too high and restrictive, potentially slowing down the economy. Despite inflation risks, the Fed believes cutting rates could help stabilize economic growth.

How has the Federal Reserve's stance on the labor market evolved in recent months?

The Fed’s stance on the labor market has evolved from a focus on protecting jobs to being more relaxed. Powell noted that while the unemployment rate remains low, job creation has slowed, and the labor market is cooling in a way that no longer raises significant concerns.

What did Powell say about the potential for a rate cut in January 2025?

Powell stated that it’s highly unlikely the Federal Reserve will cut rates in January 2025, giving a strong indication that the Fed would hold rates steady for the time being, as conditions need to improve further for rate cuts to be justified.

What did Powell mean when he said the labor market has 'gotten a little bit better'?

When Powell mentioned that the labor market has 'gotten a little bit better,' he was referring to the fact that job creation has remained steady, and while it's not growing rapidly, it is not deteriorating either, which suggests the labor market is stable.

What is the Federal Reserve's projection for inflation in 2025, and how does it impact rate cuts?

The Federal Reserve has revised its inflation projection for 2025, with core inflation expected to be between 2.5% and 2.7%. While this indicates progress from the current rate of around 2.8%-2.9%, it still falls short of the Fed's target of 2%, which will influence their cautious approach to rate cuts.

What does Jerome Powell expect for the economy in 2025, and why is he optimistic?

Powell expressed optimism about the economy in 2025, believing that it is in a 'really good place.' He feels confident that inflation will continue to decrease, and that the Federal Reserve's policies will support solid economic growth and a strong labor market.