The Federal Open Market Committee's final meeting of the year on December 8 is approaching, and inflation has once again become a thorny problem for the Federal Reserve.
Inflation has now stayed above the Fed's 2% target for five consecutive years, prompting warnings from Fed officials.
Experts and traders believe a 25 basis point rate hike in December is the most likely scenario.
At the start of this year, the Fed was still optimistic about the U.S. economic outlook. Inflation appeared to be on a downward path, and the impact of Trump's tariff policies was gradually fading. At the time, economists including those at Goldman Sachs expected the Fed to begin a rate-cutting cycle. But reality moved in the opposite direction: inflation reared its head again, becoming the Fed's biggest headache, forcing it to raise rates in September, the first hike since 2023.
As the December 8 FOMC meeting, the last policy gathering of the year, draws closer, October consumer price index data came in above market expectations: a 0.4% month-on-month increase versus the 0.3% forecast by economists surveyed by Dow Jones; core CPI rose 0.3% month-on-month versus an expected 0.2%.
According to the CME FedWatch tool, traders are now convinced the Fed will hike next month, with the only question being the size of the move. Nearly 88% of market participants expect a 25 basis point increase, while the rest anticipate a 50 basis point hike.
Inflation and the Cost of Living
The high cost of living has consistently been the issue Americans care about most. Vice President J.D. Vance partly attributed the Republicans' significant midterm election losses to cost-of-living inflation.
"The inflation problem is squarely in front of us and it continues to fester," Chicago Fed President Austan Goolsbee said Tuesday on PBS. He described the price issue as "touching everyone's nerves" and called the latest inflation data "almost unsettling."
Fed Governor Christopher Waller said Tuesday that if inflation reports keep running hot, he would lean toward supporting a 50 basis point hike in December; if core CPI comes in around 0.3%, then 50 basis points should be included as a policy option.
Chester Liao, G7 economist at OCBC Research, said Thursday: "The latest CPI data strengthens the case for short-term monetary tightening, though a 25 basis point hike in December should already be sufficient."
Robert Sockin, chief U.S. economist at PGIM, argued in a Thursday research note that even after one rate hike, upward inflation pressure may persist.
Sockin analyzed that with Democrats controlling Congress next year, Trump could still raise tariffs further through executive orders. At the same time, the labor market remains broadly solid, so rate hikes will not deal a heavy blow to major sectors of the U.S. economy, leaving room for further increases down the road.
He added: "We still expect the Fed to raise rates by a cumulative 100 basis points, starting a new hiking cycle in December and then raising once every quarter."
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