If Inflation Increases, Forget About Interest Rate Cuts

If higher wages and higher oil prices push up inflation next year, interest rates won’t be cut and may even be raised.

Recently, Federal Reserve chair Jerome Powell said that with the inflation rate falling and the labor market cooling, interest rates have likely peaked. He further added that the Fed could cut interest rates three times next year and perhaps four times in 2025. The investment community welcomed this news as the stock market soared to new highs. But will those rate cuts happen?

Powell notes that the annual inflation rate, which peaked at 9.1% in June 2022, has fallen steadily. Powell says that the rapid increase in interest rates which began in June 2022 and ended this past summer resulted in the dramatic fall in inflation.

For the past four months the annual inflation rate, as measured by the Consumer Price Index, has remained below 4% and is now at 3.2%, which is close to the Fed’s 2% target. Powell also noted that the Fed accomplished this without any significant increase in the unemployment rate which is currently below the 4% target that economists would call a full-employment economy. Powell says the economy will experience a soft landing.

All of that may be true and is welcomed. But a closer look at the numbers reveals that all is not quite as good as…