In recent years, the Federal Reserve executed one of the most aggressive rate-hiking campaigns in history to curb inflation, which had reached multi-decade highs.
After maintaining elevated interest rates for over a year, the Fed initiated its rate-cutting cycle in late 2024, reducing rates by a total of 1% between September and December. Where do things stand now? The central bank continues to balance its dual mandate: (1) ensuring price stability through low and steady inflation and (2) maintaining full employment by fostering job growth and keeping unemployment low.
The charts below illustrate a shift in this balance as we move through early 2025.
Inflation Trends: The left chart tracks the year-over-year change in the Consumer Price Index (CPI), which measures price fluctuations for a broad range of goods and services. While inflation has declined significantly from its mid-2022 peak of around 9%, progress has stalled. In January 2025, CPI rose by 0.5% month-over-month, the sharpest increase since August 2023. This pushed the annual inflation rate up to 3.0% from 2.9% in December. With CPI hovering around 3% since late 2023, concerns are growing that inflation may remain above the Fed’s 2% target for an extended period.
Labor Market Strength: The right chart illustrates the U.S. unemployment rate, showing that the labor market remains robust by historical standards. In January, unemployment edged down 0.1% to 4.0%, its lowest level since May 2024. Job growth remained steady at 143,000 new jobs, signaling continued labor demand despite cooling from the post-pandemic hiring surge. Additionally, job revisions for November and December 2024 were positive, adding 100,000 more jobs than initially estimated. While the Fed cited rising unemployment as a key reason for rate cuts in 2024, recent data suggests the labor market is holding stronger than expected.
The latest CPI and unemployment reports highlight the complex economic landscape the Fed must navigate. The central bank began cutting rates in 2024 as its priority shifted from fighting inflation to supporting employment. However, with inflation progress stalling and the labor market remaining firm, many analysts now expect the Fed to pause its rate-cutting cycle until clearer economic signals emerge. Reflecting this shift, the Fed held interest rates steady at its January 2025 meeting after three consecutive cuts in late 2024. Fed Chair Jerome Powell has reinforced this cautious approach, stating, "We don’t need to be in a hurry" to adjust rates under current conditions. As a result, market expectations have shifted, with the next anticipated rate cut now projected for June 2025.
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