When the Federal Reserve goes to work, it’s got to keep an eye on its dual mandate: maximum employment and price stability.
Related: Fed members reset interest rate cut forecasts for 2025
The Fed helps manage the economy by influencing borrowing costs, adjusting overnight interest rates in an effort to maintain those goals of price stability and low joblessness.
On Dec. 18, the central bank announced its third and final interest rate cut of the year, reducing its benchmark Federal Funds Rate by 0.25 percentage points to between 4.25% and 4.5%.
Many factors go into Fed rate decisions. Coming up on Jan. 14, we’ve got the Producer Price Index of wholesale inflation, and the following day comes the December Consumer Price Index.
The CPI is a widely used inflation benchmark, gauging the level of price pressures in the world’s biggest economy and the way they influence consumer and investor behavior. The Fed prefers the Personal Consumption Expenditures Index, which adjusts for changes in consumer spending patterns, to help formulate monetary policy. That report is due Jan. 31.
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“Inflation reports will dominate this week’s economic calendar,” said Bill Adams, chief economist for Comerica Bank. “Driven by high energy prices, the Consumer Price Index probably accelerated on a monthly and annual basis in December, while core CPI likely matched November’s pace.”
High energy prices likely pushed up producer prices as well, and the New York Fed will probably report year-ahead household inflation expectations rose last month, he added. A similar reading from the University of Michigan’s benchmark consumer sentiment survey, published last week, showed the highest year-ahead levels for inflation expectations since 2008.
Michelle Bowman, a governor within the U.S. Federal Reserve, said she supported the Fed’s December policy action. Photographer: Al Drago/Bloomberg via Getty Images
Board members speak out
Last week, the Bureau of Labor Statistics said 256,000 new jobs were created in December, well ahead of Wall Street’s 164,000 forecast and the downwardly revised 212,000 reading from November.
David Doyle, head of economics at Macquarie, said the employment report “was robust and supportive of our team’s view for stabilization in the labor market in 2025.”
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“This report is in line with our team’s base case for limited further easing” from the Fed’s policy-making Federal Open Markets Committee, he said. “We continue to see just one more 25 basis point cut ahead with the [Federal Funds Rate] troughing in the 4% to 4.25% range for the cycle.”
“While our base case remains for this to occur in March or May, risks have become skewed to a later timing than this,” he added.
Two Federal Reserve boards recently discussed the economy.
Federal Reserve Governor Michelle Bowman said during an address before the California Bankers Association 2025 Bank Presidents Seminar that she had supported the recent interest rate cuts but doesn’t see the need to go any further.
“At both our November and December meetings the Committee lowered the target range for the Federal Funds Rate by a quarter percentage point, bringing it” to 4.25% to 4.5%, she said on Jan. 9.
“I supported the December policy action because, in my view, it represented the committee’s final step in the policy recalibration phase,” she continued.
Bowman notably dissented on the Fed’s September rate-cut decision — to a range of 4.75% to 5% — which was its first rate cut in the current cycle since 2020.
On Jan. 8, Fed Governor Christopher Waller said he expected inflation to move closer to the Fed’s 2% target in the coming months.
Analysts note a strong labor market
“My bottom-line message is that I believe more cuts will be appropriate,” Waller said in Paris at the Organization for Economic Cooperation and Development. “If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view.” President-elect Donald Trump has threatened to impose tariffs on a range of goods from a number of countries.
Veteran analyst and trader Stephen Guilfoyle noted in his Jan. 13 column on TheStreet Pro that Bowman, “as she has been of late, was front and center as the leader of the policy hawks, and she flat out questioned whether or not the current policy was restrictive enough.”
Related: CPI inflation report sparks Fed interest rate cut bets
“The rest of the crew sounded more or less pragmatic, at best, or uncertain at worst,” said Guilfoyle, whose career began on the New York Stock Exchange floor in the 1980s.
“Really only Philadelphia’s Patrick Harker came off as decisively dovish,” he added. “Philadelphia, for that matter, does not vote this year, and Harker will retire after the June meeting. … So really, who cares?”
Harker had said officials were on track to lower interest rates this year, but the exact timing will depend on what happens with the economy.
Bank of America revamps Fed interest rate forecast for 2025
Bank of America Securities economists have been surveying the interest rate scene and have changed their stance.
After the stronger-than-expected U.S. Bureau of Labor Statistics jobs report last Friday, “our U.S. economists revised their Fed call and now expect no further cuts over the forecast horizon,” the investment firm said on Jan. 13. “They expect the Fed will now be on an extended hold and see risks for the next Fed move more skewed to a hike vs cut.
“Their logic: Inflation is above target and the Fed was primarily cutting to ensure a strong labor market, which has been met,” Bank of America added. “This means no further cuts needed.”
As a result, a group of analysts led by Mark Cabana said that B of A’s U.S. rates strategy team was revising its rate forecasts higher after the Fed-call change.
“We revise our forecasts higher by 50 basis points across our forecast horizon, consistent with the shift in Fed cutting trough,” the team said.
B of A said its rate forecasts are slightly below the forwards but well above the consensus.
“We see risks to our forecast as balanced,” the firm said. “Rates can rise with further reduction of Fed cuts, rising odds of Fed hikes, or sharper U.S. Treasury securities supply-and-demand imbalance. Rates can also decline if slower growth or continued negative feedback from higher rates into risk assets.”
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