Fed continues its rate easing even as elevated inflation persists while data clarity fades…
- Today’s 25-basis-point rate by the Federal Reserve Open Market Committee (FOMC) continued its broader interest rate easing cycle. Given Chair Powell’s post meeting comments, interest rate futures declined appreciably from an 85% probability to a 69% likelihood of another quarter-point rate cut in December. The Fed chair emphasized a more data dependent strategy moving forward as progress on inflation has stalled although appreciable concerns remain regarding the weakened labor market. At this stage, the central bank’s bias is inclined towards continued easing policy into early 2026, though much less certain than mere days ago.
- The Fed’s dual mandate—maximum employment and price stability—has rarely been under greater strain. Labor market indicators show slowing job creation, rising part-time employment, and waning worker confidence. By lowering rates, policymakers aim to stabilize employment and sustain consumer spending, though doing so risks reigniting inflation. With core CPI still running at 3%, well above the Fed’s 2% goal, each additional rate cut could deepen concern that policy is turning prematurely accommodative.
- We do not agree with the Fed’s more recent rate reductions as inflation has been hovering at the 3% level for almost 2 years. If price increases remain at these levels for the indefinite future, we are extremely concerned that inflation expectation will become anchored at these levels, or higher. By accommodating labor markets today, future labor markets could be severely hurt as the Fed is forced to pursue an extremely hawkish policy to regain control of inflation and return it to the 2% target.
- Complicating matters further, the ongoing government shutdown has severely limited visibility into economic activity. The Department of Labor’s delayed release of the Consumer Price Index (CPI) – necessary for calculating next year’s Social Security cost-of-living adjustment – showed headline and core inflation both rising 3.0% year-over-year, modestly below expectations but still uncomfortably high. The resulting 2.8% COLA for 2026 underscores the persistence of underlying price pressures. With few economic reports available, investors are left to interpret fragmentary signals. Treasury yields eased slightly, and equity markets advanced on the CPI announcement, reflecting optimism that policy will remain supportive into next year. Whether that optimism holds will depend on whether inflation continues to moderate – or forces the Fed to pause an easing cycle barely underway.