After the release of the U.S. November CPI: A rate cut in December is almost certain, and the pace of rate cuts in 2025 may slow down

According to the Zhitong Finance APP, the latest U.S. inflation data may make the Federal Reserve more cautious about the pace of interest rate cuts, but not just yet. Following the release of the expected U.S. November CPI, investors still generally anticipate that the Federal Reserve will cut rates by 25 basis points next week.

Meanwhile, persistent price pressures have also highlighted concerns that progress toward the Federal Reserve's 2% inflation target may stall. These concerns may prompt Federal Reserve officials to temper their expectations for the number of rate cuts in 2025, as they await more evidence that inflation is on track to meet the target. The Federal Reserve will release the latest dot plot reflecting policymakers' interest rate forecasts at the end of next week's policy meeting.

Former Cleveland Fed President Loretta Mester stated, "I think they can safely cut rates by 25 basis points in December. The market is already prepared for this. However, they need to reconsider the situation for next year, as it now appears that the process of inflation retreating has indeed stalled."

Three months ago, the Federal Reserve initiated the rate-cutting cycle with a 50 basis point cut due to growing concerns that the cooling U.S. labor market was approaching a dangerous tipping point. If the Federal Reserve cuts rates by 25 basis points next week as the market widely expects, it will mark the third consecutive rate cut, bringing the federal funds rate down to 4.25%-4.5%, a full percentage point lower than early September levels.

However, this is still well above policymakers' median estimate of a final rate stabilization at 2.9% made in September. Policymakers are now in no rush to bring rates down to that level because, since September, the pace of inflation retreat has been slower than expected, and the labor market has not been as weak as feared. Officials, including Federal Reserve Chair Jerome Powell, have responded by indicating a readiness to gradually lower borrowing costs.

If policymakers maintain their September forecasts, the Federal Reserve will cut rates four more times in 2025 after the December cut. However, many analysts expect that due to increasing concerns about inflation stickiness, the number of rate cuts in 2025 will decrease, especially if a cut occurs next week.

Conrad DeQuadros, senior economic advisor at Brean Capital LLC, stated, "Doves hoping for rate cuts will pay the price of higher rates. We will get rate cuts, but future cuts will be much smaller."

According to the pricing of federal funds futures, investors expect the Federal Reserve to cut rates in December, with two to three more cuts expected next year. Julia Coronado, founder of MacroPolicy Perspectives and former Federal Reserve economist, also believes that some Federal Reserve officials may reduce their expectations for the number of rate cuts in 2025.

Data released by the U.S. Bureau of Labor Statistics on Wednesday showed that the U.S. November CPI rose 2.7% year-on-year, in line with market expectations and slightly higher than October's 2.6%; it rose 0.3% month-on-month, also in line with market expectations. Excluding the volatile food and energy prices, the core CPI for November rose 3.3% year-on-year and 0.3% month-on-month, both unchanged from October and also meeting market expectations Data shows that housing prices were the main driver of the month-on-month increase in the CPI in November, contributing nearly 40% to the rise. In addition, food prices rose by 0.4% month-on-month; energy prices increased by 0.2%, ending the flat state of October.

It is noteworthy that some components of the core CPI continue to show stable growth. Among them, medical service prices rose by 0.3% month-on-month, used car and truck prices increased by 2.0%, and household goods prices went up by 0.6%. However, communication prices declined for the third consecutive month, falling by 1.0% month-on-month in November.

After the data was released, traders increased their bets on a rate cut by the Federal Reserve in December. The CME FedWatch tool shows that the probability of a Fed rate cut in December surged to about 90%, up from around 80% a day earlier.

James Athey, portfolio manager at Marlborough Investment Management, stated: "It now seems that the rate decision for December is set; the Fed is not the type of central bank that likes to surprise the market."

Economists Anna Wong and Stuart Paul noted: "The strong core CPI data in November will intensify concerns among a minority of members of the Federal Open Market Committee that anti-inflation efforts have stalled. Indeed, rental inflation has finally receded—as long shown by market rents—but commodity prices have lost their anti-inflation momentum."

Sticky inflation data may also intensify questions about whether the neutral interest rate is currently higher. If the neutral rate is now higher, it would suggest that the downward pressure of interest rates on the economy is not as significant as previously predicted. Fed officials do not want interest rates to be overly restrictive to avoid harming the labor market, but they also do not want to cut rates too quickly to prevent rates from falling below neutral levels and reigniting inflation risks