The Federal Reserve cut interest rates by a quarter percentage point Wednesday, in line with market expectations, even as inflation has reaccelerated over the past two months.
Fed officials have been trying to find the right tempo for rate cuts since starting them in September with a sizable half-point reduction, and Wednesday’s cut — the third in a row — shows them pressing ahead with their strategy despite some underlying strength in labor and price data.
The economy added a robust 227,000 jobs in November after the labor market stalled out in October due to hurricanes and strikes. Prices in the consumer price index (CPI) have jumped to a 2.7-percent annual increase from 2.6 percent in October and 2.4 percent in September.
Removing the more volatile categories of energy and food, “core” consumer prices stayed even in November at a 3.3-percent annual increase after rising slightly in October. Wage growth has outpaced core price growth since July, with average hourly earnings posting a 4-percent annual increase in November.
Investors expressed concerns Wednesday that continued steady cuts from the Fed might not be in the cards if prices trend upwards.
“If inflation continues to stay above target in the new year, the markets may be too optimistic on how many cuts the Fed may deliver,” Joe Gaffoglio, CEO of Mutual of America Capital Management, said in a Wednesday commentary.
Cooling prices in the services sector, especially in housing, may be bolstering the Fed’s confidence on cuts. Inflation in housing prices has been running above the headline number since 2022, but moderated to a 4.1 percent annual increase in November even as prices increased overall.
Removing shelter from the CPI, inflation has been hovering around the Fed’s 2-percent target for the last year-and-a-half. Mortgage rates are undergirded by interbank lending rates, and the price of financing in general increases as interest rates go up.
“The Fed has spent the last 18 months fighting goods and services inflation that doesn’t exist, while making the housing affordability crisis worse,” Kitty Richards, senior fellow at the Groundwork Collaborative think tank, wrote in a commentary.
“In the process they have made everything more expensive for all of the American families who have car loans and student debt, and use credit cards to make ends meet during tough times.”
