Fed’s Inflation Forecasts Surge, Risks Shift Toward Upside
The Federal Reserve has indicated a more cautious approach to rate cuts, highlighting rising inflation risks, and has adjusted its inflation forecast for 2025 in its latest projections.
Officials at the Federal Reserve have significantly increased their inflation expectations for 2025, as the risks associated with the inflation outlook have shifted from “balanced” to “upside.” Consequently, markets have adjusted their forecasts regarding the speed of future rate cuts, amid concerns that inflationary pressures may persist for an extended period.
Adding to the concerns about the inflation outlook, the risks associated with both PCE and core PCE inflation have now been reassessed to reflect an upside bias. In the latest economic projections, Federal Reserve officials have altered their view from September’s “broadly balanced” risks to “weighted to upside,” with greater uncertainty in the inflation outlook.
In light of the heightened inflation expectations and the shift in risk, Federal Reserve officials also plan to reduce the pace of rate cuts as reflected in the updated projections. In September, policymakers anticipated a median rate of 3.4 percent for both 2025 and 2026, but this expectation has now escalated to 3.9 percent for next year, remaining at 3.4 percent for 2026.
“The prevailing sentiment for 2025 is that we are looking at higher rates for a longer duration,” remarked Bankrate Chief Financial Analyst Greg McBride, speaking to The Epoch Times. “The Fed’s updated projections suggest a shared anticipation of only two interest rate cuts for the upcoming year, diverging from the four cuts expected in September.”
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Powell reiterated the Fed’s commitment to achieving an inflation rate around the 2 percent mark and emphasized that policymakers will closely monitor incoming data to inform future monetary policy decisions. He also refrained from categorically stating that the central bank would refrain from raising interest rates if inflation were to surge again.
“In this environment, nothing can be entirely ruled out,” he stated.
The Fed’s updated projections, which indicate fewer rate cuts than markets had anticipated, led to a widespread selloff in the stock market, with the Dow Jones closing down by 1,123 points on the day.
During the press conference, Powell noted that while the Fed has made “significant progress” toward bringing inflation closer to target, many Americans still bear the burden of persistent inflationary pressures.
“The significant pain stems from a global surge in inflation that affected all advanced economies simultaneously,” Powell remarked. “Although inflation levels have decreased, consumers still face elevated prices.”
He added that the “best outcome” for American households is for inflation to return to targeted levels, ensuring that wage growth outpaces price increases.
“This is essential for restoring public confidence in the economy,” he concluded. “That is our goal, and we are dedicated to achieving it.”
The Federal Reserve’s adjustment to its interest rate outlook and the recognition of upside inflation risks occur amid a backdrop of economic uncertainty. While recent economic indicators suggest steady growth, the labor market has shown signs of slackening, with an increase in the unemployment rate.
