The probability of the Federal Reserve cutting interest rates in December has exceeded 80%, but officials feel uncertain about the subsequent outlook

Several Federal Reserve officials reiterated on Wednesday that they are deeply uncertain about how much they need to lower interest rates, highlighting the difficulties decision-makers face in trying to determine the right settings to keep the economy stable.

Kansas City Fed President Jeff Schmid said at an energy conference co-hosted with the Dallas Fed, “While now is the time to start dialing back restrictive monetary policy, how much further rates will decline, or where they will ultimately settle, remains to be seen.”

Comments like Schmid's are becoming a mantra among Fed officials. Many believe that the neutral interest rate (the level at which interest rates neither stimulate nor suppress economic growth) has likely risen since the COVID-19 pandemic. However, no one is confident about the specific position of the neutral rate.

“It is important to note that the uncertainty surrounding the neutral rate has also increased, possibly due to relatively new changes in the economic structure that require time for a comprehensive assessment,” Dallas Fed President Lorie Logan said in a separate speech at the same conference.

This uncertainty places heavy pressure on Fed officials, as exceeding the neutral level could potentially reignite inflation. This may lead them to act more cautiously and possibly adopt a pause in the rate-cutting cycle.

Logan stated that “broadly consulted models” suggest the neutral federal funds rate is between 2.74% and 4.6%. Currently, the midpoint of the Fed's policy rate is at the upper end of this range.

She added that she believes more rate cuts are on the horizon, but the Fed should “exercise caution at this time.”

After a report showed that the inflation rate in October was largely in line with economists' expectations, Fed speakers on Wednesday generally expressed confidence that inflation will continue to trend down toward the 2% target.

“Right now, I believe inflation is moving in the right direction. I am confident about that, but we need to wait,” Minneapolis Fed President Neel Kashkari said in an interview. “We have another month or six weeks of data to analyze before we make any decisions.”

Kashkari indicated on Tuesday that if inflation data surprises to the upside from now until the Fed's December meeting, he might support pausing another 25 basis point rate cut. The Fed lowered the benchmark rate by 50 basis points in September and again by 25 basis points this month.

The consumer price index (CPI) released on Wednesday showed that the core CPI, excluding food and energy costs, rose 0.3% for the third consecutive month. Overall, the CPI increased 2.6% year-on-year, marking the first year-on-year growth since March of this year. Following the release of the new data, investors increased their bets on the Fed cutting rates again at the December meeting. Swap traders raised the probability of a rate cut by the Fed on December 18 from around 56% earlier on Wednesday to about 80%. By June of next year, they are pricing in a cumulative rate cut of slightly more than 60 basis points Alberto Musalem, President of the St. Louis Federal Reserve, said during a speech in Memphis that the Federal Reserve is expected to achieve its inflation and employment targets, but he emphasized that officials should maintain a "moderately restrictive" policy while price growth remains above the 2% target.

He stated, "In my baseline scenario, based on current information, I expect inflation to converge towards 2% in the medium term," but he added that officials should "carefully and patiently" assess upcoming economic data when considering further interest rate cuts.

During the Q&A session following his speech, Musalem indicated that recent information suggests that inflation may be stalling on its downward path, and the risk of it rising has increased.

He mentioned that this data indicates the economy is "stronger, perhaps with substantial enhancement compared to the past," and that some measures of inflation have "slightly increased." However, he noted that the Federal Reserve's policy is well-prepared