The three giants of the Federal Reserve speak out together: Confidence is high as inflation slows, and a soft landing for the economy is in sight!

According to the Zhitong Finance APP, Federal Reserve officials welcomed the lower-than-expected increase in the December Consumer Price Index, believing it indicates that inflation is likely to continue to decline. John Williams, President of the New York Fed, pointed out that the disinflation process is underway, but there is still a gap from the 2% inflation target, requiring more time to achieve it sustainably. He also mentioned that the recent rise in long-term interest rates reflects both the strength of new data and market concerns about uncertainties related to fiscal policy, other policies, and global developments. Tom Barkin, President of the Richmond Fed, stated that the new price data continues the trend of inflation declining to target levels, but policymakers still need to take restrictive measures to ensure inflation smoothly returns to 2%. Austan Goolsbee, President of the Chicago Fed, welcomed the latest consumer price data, believing it supports his outlook for easing price pressures and expressed optimism for 2025, believing a soft landing can be achieved.

Specifically, John Williams, President of the New York Fed, noted during a speech in Hartford, Connecticut: "The disinflation process is underway, but we have not yet reached the 2% target, and more time is needed to achieve this goal."

After the speech, Williams further explained to reporters that the recent rise in long-term interest rates reflects both the strength of new data and market concerns about uncertainties related to fiscal policy, other policies, and global developments. He emphasized that although market indicators of inflation compensation have not shown significant fluctuations, this uncertainty seems to be a stronger driving force than changes in the trajectory of monetary policy or inflation and employment data.

Williams also mentioned that estimated prices (especially those closely related to stock market trends) are a factor in the rise of inflation data over the past few months, a view that aligns with that of Federal Reserve Chairman Jerome Powell and Governor Christopher Waller. He expects economic growth to slow to about 2% this year, partly due to the impact of reduced immigration.

"The direction of monetary policy will depend entirely on the data," Williams emphasized, "The economic outlook remains highly uncertain, especially regarding potential fiscal, trade, immigration, and regulatory policies."

Meanwhile, Tom Barkin, President of the Richmond Fed, stated at another event in Annapolis, Maryland, that the new price data continues the trend of inflation declining to target levels. He similarly warned that policymakers need to continue efforts to complete this task. "I believe we still need to take restrictive measures to ensure inflation can smoothly return to 2%," Barkin said.

However, Barkin also pointed out that the economic outlook is full of uncertainties, making it difficult to predict the specific implementation of Federal Reserve policies. Regarding how President Donald Trump's economic plan will affect the Fed's actions, he believes it is too early to judge, as many proposals have yet to be finalized.

In terms of the labor market, Barkin expressed optimism about data released earlier this month, which showed high employment numbers in the U.S. by the end of 2024 and a slight decrease in the unemployment rate. Futures markets indicate that investors generally expect Federal Reserve officials to maintain interest rates at the meeting on January 28-29, which aligns with the median forecast from Fed officials in December that there will be two rate cuts this year Barkin will not participate in the Federal Reserve's interest rate decision voting this year. He pointed out after making similar remarks at another event on January 3 that the recent rise in long-term Treasury yields may not necessarily affect the Fed's policy decisions. He believes that the rise in yields reflects more the supply and demand conditions in the U.S. Treasury market rather than a change in expectations for the Fed's short-term policy path or an increase in overall economic inflation expectations.

Chicago Fed President Austan Goolsbee also welcomed the latest consumer price data, which supports his view on the outlook for easing price pressures. Although broad inflation indicators accelerated due to rising energy costs, core price growth in December slowed for the first time in six months. Goolsbee stated in a virtual event, "Inflation trends continue to improve. I am optimistic about 2025, believing we can sustain growth and achieve a soft landing."

At its December meeting, the Fed cut rates for the third consecutive time, bringing the rate down to a range of 4.25% to 4.5%. Many Fed officials indicated that due to a robust labor market and inflation rates above the 2% target, they expect the pace of rate cuts to slow significantly this year. Goolsbee noted that rates are still above the neutral rate level, which neither pressures the economy nor stimulates it.

Additionally, Goolsbee discussed the steady rise in housing price inflation, which is one of the important factors driving up home prices. He also pointed out that there has been a seasonal pattern in the U.S. for years, with lower inflation rates in the second half of the year and higher inflation rates in the first quarter. Regarding how the policy proposals of President-elect Trump (including new tariffs and immigration restrictions) might affect the economy, Goolsbee stated that if Congress and the president begin to formulate policies that raise prices, the Fed must take that into account, but more importantly, the overall impact of policies rather than individual policies.

However, Fed officials have not clearly indicated when they might cut rates again.

According to the December CPI (Consumer Price Index) report released by the U.S. Bureau of Labor Statistics, the U.S. unadjusted CPI year-on-year rate rose to 2.9% in December, marking a rebound for the third consecutive month and reaching a new high since July 2024, in line with market expectations, with a previous value of 2.7%. The U.S. unadjusted core CPI year-on-year rate recorded 3.2%, the lowest since August 2024, with market expectations flat at 3.3%. This data helps alleviate financial market concerns about inflation pressures, which had previously led the 10-year U.S. Treasury yield to climb to its highest level in over a year in recent weeks.

Figure 1

Investors currently expect that the Fed is likely to cut the benchmark rate by one percentage point in the last few months of 2024, followed by another half-point cut this year, consistent with the predictions of Fed officials in December last year Recent consumer surveys indicate that inflation expectations have risen, which may be related to concerns about the proposed policies of the incoming Trump administration (such as increasing tariffs on imported goods), although Williams downplayed such worries. He emphasized that survey and market-based indicators show that inflation expectations remain stable and within pre-pandemic ranges.

On the other hand, other indicators show that the labor market remains strong, reducing the urgency for Federal Reserve officials to continue cutting interest rates. The monthly employment report released by the U.S. Bureau of Labor Statistics on January 10 showed that non-farm payrolls increased by 256,000 in December, the highest level in nine months, and the unemployment rate also slightly decreased to 4.1%.

Notably, in addition to the widely watched CPI data, Federal Reserve Chairman Jerome Powell and his colleagues are increasingly focusing on a relatively lesser-known price indicator—the "market-based" inflation measure, which has become another support for their optimistic economic outlook. Unlike the Fed's preferred measure of underlying inflation, this indicator cleverly excludes service items that must rely on estimates due to data collection limitations, thereby painting a more unique and realistic picture of recent inflation.

Figure 2

In the context of rising government bond yields and a cooling market expectation for Federal Reserve rate cuts in 2025, the frequent mention of this alternative indicator by Federal Reserve officials may suggest that the criteria they rely on when considering further monetary policy easing are quietly changing, showing a certain increase in flexibility.

Federal Reserve Governor Christopher Waller explicitly articulated the rationale for adopting this market-based indicator in a speech and expressed support for continuing rate cuts this year. Additionally, the latest minutes from the Federal Reserve's meetings revealed that many policymakers share Waller's view, believing that the price estimates of large service items not included in the market-based Personal Consumption Expenditures (PCE) price index calculation—such as portfolio management, investment advice, and various insurance services—have somewhat driven recent inflation upward, but Federal Reserve officials may not consider these factors as key guides for future inflation predictions.

At this time, the U.S. Bureau of Economic Analysis is scheduled to release December's PCE inflation data on January 31, which will undoubtedly provide the market with a more detailed overview of the inflation situation and further guide the Federal Reserve's future policy direction