The Fed contemplates gradual rate cuts if inflation continues to fall

The heads of the Federal Reserve (Fed) showed optimism regarding the decline in inflation and the strength of the labor market, which could lead to further interest rate cuts that would be implemented gradually.

According to the latest Federal Open Market Committee (FOMC) meeting minutes, although inflation remains above the Fed's 2% target, current data suggest a positive trend.

"If the data came in about as expected, with inflation continuing to move down sustainably to 2%  and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time," participants said.

During the November meeting, the FOMC voted unanimously to reduce its benchmark interest rate by 0.25 percentage point, placing it in a target range of 4.5% to 4.75%. However, Fed chairman Jerome Powell warned that there are no urgent signs to warrant an acceleration in cuts, and policymakers are expected to meet again in December to assess the situation.

Inflationary factors

Officials noted that several factors are putting downward pressure on prices. These include the declining pricing power of firms and still-tight monetary policy. In addition, the slowdown in the pace of rent increases is expected to contribute to lower inflation in the near future.

The labor market

Although only 12,000 jobs were created in October, a low number because of the storms and strikes that hit the country, Fed officials still believe labor market conditions remain solid. "There were no signs of a rapid deterioration in labor conditions, and layoffs remained low," they said.

What to expect going forward?

While it was initially thought that the Fed would cut rates faster, markets now believe there will only be a slight tightening in December and that cuts will be more moderate through 2025. Fed officials will continue to monitor the situation closely to make appropriate decisions.