Federal Reserve in Serious Trouble: “Inflation Projection Has Fallen Apart”
Okay, so here’s what’s going on. The Federal Reserve is in trouble. They were supposed to cut interest rates four times next year in 2025. So that was their official projection written in their SCP.
Now, because inflation is coming in hotter than expected, it’s worse than, you know, what they thought, they’re now saying that their official projection is two interest rate cuts next year instead of four. So in today’s video, I’m going to show you the highlights of the Federal Reserve press conference. And in this first video clip, I’m going to show you Jay Powell. He says that their inflation estimates, they just have fallen apart as we approach the end of the year.
So Powell says that progress on inflation has stalled and that in order to make more, do more interest rate cuts, they want to see further progress on inflation. So take a look.
If I could follow up on that. You mentioned the risk and uncertainty indexes toward the back of the document. The upside risk to inflation jumped quite substantially. The only thing really that’s happened, you mentioned that the disinflationary story remains intact, yet the risk weighting has jumped to the upside.
The only real thing that’s happened is November 5th. In the meantime, is it fair to say that that’s what’s driving the higher sense of upside risk on inflation?
Once again, we’ve, you know, we’ve had a year on projection for inflation and it’s kind of fallen apart as we’ve approached the end of the year. So that is certainly a large factor in people’s thinking. I can tell you that might be the single biggest factor is inflation has once again underperform relative to expectations. It’s still, you know, going to be between two and a half and three, it’s way below where it was.
But you know, we really want to see progress on inflation. You know, as I mentioned, as we think about further cuts, we’re going to be looking for progress on inflation. We have been moving sideways on 12 month inflation as the 12 month window moves. That’s in part because inflation was very, very low measured in the fourth quarter of 2023.
Nonetheless, as we go forward, we’re going to want to be seeing further progress on bringing inflation down and keeping a solid labor market.
Okay, now I want you to think about this. The Federal Reserve is still projecting to cut interest rates two times next year in 2025. Right. Okay.
But if the inflation risk is elevated and inflation is already starting to tick up, then why are they going to cut interest rates at all? Right. So I’m going To show you what Powell says, his answer, and you’re going to see that he doesn’t answer the question. So the reporter follows up, asks the same question in a different way, hoping for a better response from Powell, a better answer.
But then Powell, he doesn’t give a better response. He just says, well, we’re going to cut rates because rates are just too high. They’re too restrictive.
Genus Mylik with the New York Times. Thank you for taking our questions. I wonder if you could talk a little bit about why officials think it’s appropriate to cut rates at all in 2025 if inflation is expected to remain firm throughout the year.
You ask about 2025. I think that the, the lower, the slower pace of cuts for next year really reflects both the higher inflation readings we’ve had this year and the expectation inflation will be higher. You saw in the SEP that risks and uncertainty around inflation we see as higher. Nonetheless, we, we see ourselves as, as still on track to continue to cut.
I think the actual cuts that we make next year will not be because of anything we wrote down today. We’re going to react to data that’s just the general sense of what the committee thinks is likely to be appropriate.
Sorry, just one, one quick follow up. Why, I guess, would you make those cuts? Like what would, what would be the trigger to cut?
So to cut further after this point, I would say it this way. We’ve reduced our policy rate now by 100 basis points. We’re significantly closer to neutral at 4.3% and change. We believe policy is still meaningfully restrictive.
But as for additional cuts, we’re going to be looking for further progress on inflation as well as continued strength in the labor market. And as long as the economy and the labor market are solid, we can be cautious about as we consider further cuts. And all of that is reflected to your question in the December acp, which shows a median forecast of down two cuts next year compared to four in September.
Okay, so the reporters were unsatisfied with that answer. The question still stands. If the inflation risk is higher, then why are they going to cut interest rates at all? So let’s try a third time.
You know, third time’s a charm. So please take a look.
Nick Timoros of the Wall Street Journal chair Powell. To make sure I understand, participants today revised up their core PCE inflation projection for 25 so that the central tendency runs from 2.5 to 2.7%. And as Howard noted earlier, most of the committee sees the risks to those projections to the upside. So if inflation only declines next year from 2.8 to 2.5 to 2.7, what would compel the committee to be cutting in that situation?
Let me find these numbers. So we have, we have, we have inflation coming down, core inflation coming down to two and a half next year. That’s, that’d be a, that’d be significant progress. You see a slower path, I think that does take on board that we want to see real progress.
But we, we, you know, we’d be seeing meaningful progress to get inflation down to that level. That wouldn’t be all the way to 2%, but that would be, it would be better than this year. This year will be 2, 8 or 2, 9. That would be meaningful.
Okay, so we’re just going to move on now. Let me ask you, do you remember, why did the Federal Reserve start cutting interest rates at all? Why did the Federal Reserve pivot? You know, their narrative, their story was to, we’re going to cut interest rates to protect the labor market.
So they were so afraid of deterioration in the labor market that they cut interest rates by 0.5%. You know, that’s a big cut. And then they followed it up with another 0.25% rate cut. And then this most recent meeting, they cut again by 0.25% to protect the labor markets.
Okay, so what happened to that narrative? Because, you know, I’ve been calling BS on that narrative this whole time. So in this video clip, Powell says that the labor market has now gotten better and that it’s no longer a concern. So that narrative, that story, it’s no longer going to drive further interest rate cuts.
Thank you, Colby Smith with the Financial Times. So the unemployment rate as of November, while still very low, is within spitting distance of the level that generated a lot of concern about the labor market over the summer. In the lead up to the 50 basis point cut in September, hiring has also narrowed to just a handful of sectors. But now the committee appears comfortable skipping cuts at upcoming meetings.
So what is changed about the committee’s assessment of the risks confronting the labor market? Is there just less concern now on that front or is it just about there being more upside risk to inflation that now needs to be accounted for?
The, the unemployment rate is now, is now the same as it was in July, 4.2%. It’s moved up and down, but it’s now the same as July. And job creation is, is lower than it has been. But it’s been, it’s been steady.
It’s not, it’s not declining. It’s steady at a level which, as I pointed out a couple of times is actually below the level that would hold the unemployment rate constant, but it’s not so far below. So you might, you might if, if, if we have the break even level. Right.
And if jobs continue, job creation continues at that level in the establishment survey, then you would get a tenth, maybe every other month kind of thing. So gradually declining. We don’t have that kind of precision in this. So you’re right, though.
And I read out some of the reasons. We do think the labor market is still cooling by many measures and we’re watching that closely. It’s not cooling in a, in a quick or in a way that really raises concerns. I think, you know, you pointed out participants in the FOMC really thought that the risks and uncertainty had improved relative to the labor market.
And it’s because of it, because things have just gotten a little bit better. It doesn’t the unemployment rate flat and things like that. Nonetheless, you know, we’re watching it closely now.
I want to show you this video clip. I think it’s a great question. The reporter asks, will this be the last rate cuts for a while? And Powell says, you know, the typical, oh, we take meetings, you know, one meeting at a time.
No decisions have been made. However, if you want my opinion, my honest opinion, I believe if you’re looking for a rate cut in January, I would say good luck. There’s a snowball chance in hell of a rate cut in January. It’s not going to happen.
If I could follow up, if somebody looked at these projections and also the insertion of the extent and timing language in the statement, which has been used at times in the past when the committee thinks maybe it’s going to be on hold for a while. And they said, gee, this looks like it could be the last rate cut for some time. Would they be mistaken to infer that?
So that’s, that’s not the, that’s not any decision that we made at all.
Now I want to show you this video clip. Please tell me what you think about this. So the question is to Powell, do you still have confidence that inflation will come down to your target of 2%? So please take a look.
If I could follow up by asking about your formulation for beginning rate cuts included the phrase we need to, to have confidence that inflation is moving down towards our target? Given the fact that you’ve raised your forecast for next year, do you have confidence or are you uncertain about the path of inflation going?
So confidence was our test for raising rates. And, you know, we’ve made, look, look at the broader sweep. We’ve made just a great deal of progress where, you know, we’re, we’re well into the twos in, in core inflation and around two and a half or even lower than that we have been for, for headline inflation. So I would say I’m confident that inflation has come down a great deal and I’m confident in the story about why it’s come down and why that portends.
Well, now I want to show you what Powell thinks About next year, 2025, what you can expect. So please take a look.
And as we look ahead to next year, what do you see as the biggest challenge to the economy under the next administration?
I feel, I feel very good about where the economy is. Honestly. I’m very optimistic about, about the economy. And it’s, we’re in a really good place.
Our policy’s in a really good place. I expect another good year next year.
Okay, so to summarize, if you were previously thinking, well, the Federal Reserve, they didn’t get inflation under control, then why are they cutting interest rates at all, if that’s what you’re thinking? I’ll tell you exactly. Reality is now setting in for the Federal Reserve. Like I told you from the start, and so many people agreed that their narrative, it just didn’t make any sense.
Anyways, let me know what you think. Please subscribe. I thank you for the support. I wish you a very nice day. Take care.
