#MacroFriday: Sticky core inflation means the Fed's work is not done yet

The disinflationary trend has stalled above the Federal Reserve’s target, reducing the likelihood of rate cuts in 2025.

Year-over-year core inflation in the US has hovered around 3.3% since May, indicating little progress in the fight against inflation during this period. While month-over-month changes in core inflation dipped below 0.2% in early summer, they rebounded to over 0.3% in November. The three-month annualized core inflation rate has also been trending upward again.

Since September, the Federal Reserve has eased its tight monetary policy by cutting interest rates. These decisions were supported by the disinflationary trend and a rise in the unemployment rate. However, economic growth in the US has remained robust despite this continued monetary restrictiveness. In the third quarter, annualized GDP growth stood at 2.8%, while the Atlanta Fed’s GDPNow indicator estimates fourth-quarter growth at 3.3%. Last week’s labor market data, including job openings and Non-Farm Payrolls, showed renewed strength.

Markets are becoming less confident about rate cuts in 2025. Current market pricing suggests a greater than 25% chance that the Fed’s key policy rate will remain above 4% in 2025, and a more than 60% likelihood that it will stay above 3.75%. These levels are well above the neutral rate, indicating both a continued growth trajectory for the US economy and persistently elevated inflation. While next week’s FOMC meeting is expected to deliver a rate cut, the tone may be less dovish compared to recent meetings.