CPI performed well! Federal Reserve "third-in-command": Inflation will continue to decline, the outlook is very uncertain, and interest rate cuts depend on the data

The freshly released December core CPI in the U.S. unexpectedly cooled down, and subsequently, a senior Federal Reserve official expressed confidence in the continued decline of inflation towards the Fed's target.

On Wednesday, January 15, Eastern Time, John Williams, the third-ranking official of the Federal Reserve and President of the New York Fed, who has permanent voting rights on the Federal Open Market Committee (FOMC), stated that inflation is still on a downward trajectory and is expected to continue cooling in the future. He anticipates that inflation will gradually return to the 2% target over the "next few years."

"The process of declining inflation is still on track. However, we have not yet reached the 2% (inflation) target, and we need more time to sustainably achieve this goal."

"Looking ahead, I expect inflation to gradually decline over the next few years, moving towards our 2% target."

Although acknowledging that inflation is likely to continue cooling, Williams reiterated that future interest rate decisions will depend on data. He stated that future monetary policy actions will be driven by economic data, as the economic environment the Fed faces in the future is highly uncertain, mainly due to potential policy changes from the incoming Trump administration.

Previously, there were widespread expectations that the tariffs and other policies to be implemented by incoming President Trump would help boost inflation. Williams stated on Wednesday that the Fed must wait for the dust to settle on Trump's policies, noting that the process of declining inflation "may be bumpy." He emphasized that the Fed's monetary policy is prepared to handle various uncertainties and is capable of withstanding risks. He said:

"Monetary policy can balance the risks we face regarding our goals well." "The path of monetary policy will depend on the data."

"The economic outlook remains highly uncertain, especially regarding potential fiscal, trade, immigration, and regulatory policies. Therefore, our decisions on future monetary policy actions will continue to be based on overall data, the evolution of the economic outlook, and the risks to achieving our dual mandate goals."

Williams believes that certain factors contributing to the decline in inflation are coming from overseas, and the U.S. labor market will not be a source of upward inflation, as there are many signs of stabilization in the job market.

Williams commented that the U.S. economy is in good shape, expecting a growth rate of 2% in 2025, partly reflecting the impact of reduced immigration. He anticipates that the unemployment rate in the U.S. will be between 4% and 4.25% in 2025. He also mentioned that the Fed's actions to reduce its balance sheet are "progressing smoothly and orderly."

On Monday, the New York Fed, led by Williams, released a December survey showing that U.S. consumers' inflation expectations for the next year slightly increased from 2.97% in November to 3%, while inflation expectations for the next three years rose from 2.6% in November to 3%, and expectations for the next five years decreased from 2.9% to 2.7%.

Williams emphasized the results of the New York Fed's survey on Wednesday, stating that the survey shows "inflation expectations have remained within the pre-pandemic range throughout all periods." He also said, "Surveys and market-based indicators show that inflation expectations remain well anchored."

Richmond Fed President: CPI Shows Inflation is Moving Downward Towards Target, Fed Rate Path Unaffected by Recent Rise in US Treasury Yields

On Wednesday, following the release of the December CPI, Richmond Fed President Barkin, who has voting rights at the FOMC meetings in 2024 and 2027, stated that the latest data shows the inflation rate in the United States continues to move downward towards the Fed's target of 2%. However, interest rates should still remain restrictive for the economy.

Barkin noted that the new CPI data "continues the story we have been watching, which is that inflation is moving down towards the target. But we still have work to do."

Barkin, along with other Fed officials including Chair Jerome Powell, had previously hinted that they would prefer a more gradual approach to rate cuts this year. On Wednesday, he said that at the stage of reaching the inflation target "final mile," "I do believe that our (policy) needs to be restrictive."

At the same time, Barkin, like Williams, pointed out that there is significant uncertainty regarding the economic outlook in the United States. Therefore, he believes it is difficult to estimate how the Fed's monetary policy will play out.

Barkin stated that it is too early to predict how Trump's economic plan will affect the Fed's actions, as many proposals have yet to be finalized.

On Wednesday, Barkin also mentioned the recent rise in long-term US Treasury yields. He believes this will not affect the Fed's decision-making considerations. The rise in Treasury yields does not reflect a change in market expectations for the Fed's short-term policy path, nor does it indicate an increase in inflation expectations for the entire economy, but rather reflects the supply and demand conditions in the Treasury market.

"So far, I have not seen any changes in interest rates that lead me to believe that our policy path needs to be influenced by these interest rate levels."

Risk Warning and Disclaimer

Markets are risky, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk