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The FED appears to be open to three to four rate cuts this year, depending on how inflation develops, according to recent statements by Fed Governor Christopher Waller. He emphasized that inflation numbers have shown a declining trend in recent months, opening the door for a potentially faster and more aggressive rate-cutting policy than previously expected.
Inflation approaches FED target
The latest inflation figures show the consumer price index (CPI) rising to 2.9% in December 2024, up from 2.7% in November. Although headline inflation was slightly higher, core inflation – excluding food and energy – remains close to the Fed’s target of 2%. Waller said this is a positive sign. “If we continue to see numbers like this, it’s reasonable to think that rate cuts could come as early as the first half of the year,” he said.
Waller indicated that a rate cut in March is not out of the question, depending on the data. He expects three to four quarter-point rate cuts in 2025, assuming inflation declines continue and the labor market remains strong.
Market expectations and reaction
Waller’s comments immediately caused a shift in market expectations. Investors who previously expected a first rate cut in June are now speculating on a possible cut in May. Futures markets show a 70% probability that the Fed will keep rates unchanged until March, but there is growing speculation about multiple cuts later in the year.
In addition, Treasury yields fell on Thursday, a signal that investors expect monetary easing. Despite this optimism, Waller warned that the pace of rate cuts will continue to depend on how “the data plays out.”
Trump administration and economic impact
The incoming administration of President Donald Trump also plays a role in the economic outlook. While some economists warn that Trump’s proposed trade tariffs could increase inflation in the short term, Waller minimized that risk, noting that such measures would have only a “marginal and short-term” impact on prices.
Still, Waller stressed that he remains focused on progress toward the Fed’s 2% target. “I’m more optimistic about the decline in inflation than some of my colleagues,” he said.
What does this mean for investors?
The possibility of multiple rate cuts in 2025 presents opportunities but also creates uncertainty. Rate cuts could be beneficial for riskier assets such as stocks and cryptocurrencies, but the impact of potential policy changes under the new Trump administration remains an unknown.
With the Fed’s first meeting of the year on January 28 and 29, the coming weeks will be crucial in determining whether the central bank will indeed take a more aggressive course in cutting interest rates.
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