Will interest rates continue to drop in December? Federal Reserve officials say inflation is moving in the right direction

The U.S. October CPI has just been released, and a Federal Reserve official commented that the inflation situation is developing in the right direction, seemingly reassuring investors who expect the Fed to continue cutting interest rates next month, although his Fed colleagues' remarks appeared more cautious.

On November 13th, Wednesday, shortly after the CPI data was released, Minneapolis Fed President Neel Kashkari stated that the key data in the latest CPI report confirms that the inflation rate is moving down towards the Fed's target of 2%.

Kashkari, who will have voting rights at the Federal Open Market Committee (FOMC) meetings in 2026, emphasized that he has not yet closely examined the CPI report data. However, he expressed confidence in the downward trajectory of inflation based on the overall data. He said:

"At this point, I believe inflation is moving in the right direction. I am confident about this, but we need to wait. We need another month or six weeks to analyze the data before making any decisions."

Currently, some economists expect that the policies of the new U.S. government under Trump may increase upward pressure on inflation. Kashkari stated on Tuesday that if the Fed is to pause interest rate cuts next month, a significant change in the inflation outlook is needed. He also mentioned that it would be difficult for the labor market to heat up significantly from now until the next FOMC meeting in December.

On the same Tuesday, John Williams, the New York Fed President and a permanent voting member of the FOMC, stated that the Fed's decision on interest rate cuts will depend on data, "likely really depending on the economic conditions and inflation data we see," although future decisions will be contingent on circumstances, "but I believe things are moving in the right direction."

The U.S. October overall CPI and core CPI growth rates, both month-on-month and year-on-year, released on Wednesday, met Wall Street's expectations. Specifically, the CPI increased by 0.2% month-on-month, core CPI rose by 0.3% month-on-month and 3.3% year-on-year, remaining flat compared to September's growth rate. The October CPI year-on-year growth was 2.6%, marking the first acceleration in year-on-year growth since March.

Following the CPI release, swap contract pricing indicated that traders expect an approximately 80% probability of the Fed cutting rates again in December. Wall Street Journal mentioned that Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, and Lindsay Rosner, head of multi-sector fixed income investment at Goldman Sachs Asset Management, both believe that the latest CPI data makes a December rate cut the most likely outcome, as inflation remains on a cooling trend.

However, the outlook for Fed rate cuts next year is less clear. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, stated that considering the uncertainties surrounding tariffs and other future Trump policies, the market is already weighing the possibility of fewer rate cuts next year than previously expected, with the Fed potentially pausing rate cuts as early as January.

Logan: It is best to be cautious with rate cuts, as there are inflationary risks from demand and geopolitical factors

Compared to Kashkari, Lorie Logan, the President of the Dallas Federal Reserve, who also has voting rights at the FOMC in 2026, appears less resolute. In the face of a slowing yet still healthy labor market, she hinted on Wednesday that she is open to a slower pace of interest rate cuts.

Some media have commented that Logan belongs to the category of Federal Reserve officials who prefer to slow down interest rate cuts sooner rather than later. Other media reported that Logan stated that a rate cut in December may not be as certain as currently priced in by the market, which dampened expectations for a December rate cut and partially pushed the dollar higher during the session.

Logan indicated that the Federal Reserve has made "significant progress" in reducing inflation and restoring economic balance, and after that, "I expect that more rate cuts will likely be needed to complete this journey. But it is difficult to determine how many rate cuts may be needed and how quickly." Logan said:

"It is best to proceed with caution," "If we cut rates too much, beyond the neutral level, inflation may accelerate again, and the Federal Open Market Committee (FOMC) may need to change direction."

Logan noted that the progress in reducing inflation is broad but has not yet returned to the Federal Reserve's 2% target. She believes there is uncertainty regarding the level of the neutral interest rate and stated that we are currently "right at the top of the expected neutral rate range."

Logan assessed that the labor market is nearing balance and is gradually cooling but has not materially deteriorated. Due to solid demand and ongoing geopolitical risks, the U.S. still faces upward inflation risks. Rising demand or supply shocks could keep inflation elevated. She mentioned some upward inflation risks, such as consumer spending and potential increases in business investment after the election.

Logan pointed out the recent rise in U.S. Treasury yields, suggesting that this could lead to economic growth slowing more than the Federal Reserve expects, thereby posing a downside risk to employment. However, she also stated that, due to the possibility that the neutral interest rate has risen in recent years, the drag of monetary policy on the economy may not be as significant as it appears