Inflation Outlook by Howard Schneider

WASHINTON (Reuters) – Inflation is expected to decline in 2025, potentially prompting the U.S. Federal Reserve to lower interest rates, though the pace remains uncertain, according to Federal Reserve Governor Christopher Waller’s statements on Wednesday.

Waller acknowledged that inflation has “stalled” above the Fed’s 2% target towards the end of 2024 but expressed confidence that inflation is easing in the U.S. based on market-based estimates and shorter-term readings.

> “This minimal further progress has led to calls to slow or stop reducing the policy rate,” Waller noted during his remarks at an OECD event in Paris. “However, I believe that inflation will continue to progress toward our 2% goal over the medium term and that further reductions will be appropriate.”

He pointed out that the timing of any cuts would hinge on inflation progress while ensuring the labor market remains intact.

During a subsequent Q&A session, Waller stated that the current policy rate is sufficient to drive inflation down without triggering a recession.

> Waller mentioned, “The current benchmark rate is restrictive but not enough to throw us into a recession,” aligning with the Fed’s outlook for declining inflation amid ongoing economic growth.

In late 2024, the Fed lowered its policy rate by a full percentage point across three meetings but is expected to maintain the current rate of 4.25% to 4.5% in the upcoming January 28-29 meeting.

While Waller refrained from specifying the number of cuts deemed appropriate this year, he recognized a wide range of opinions within the Fed, from none to as many as five cuts, which could result in a cumulative reduction of 1.25 percentage points.

Fed officials have been cautious about committing to rate cuts, given robust economic performance characterized by growth exceeding long-run potential, continuous hiring, and wage growth stimulating consumer spending.

> “I continue to believe that the U.S. economy is on a solid footing,” Waller affirmed, noting no data suggests an imminent dramatic weakening of the labor market.

On Friday, the Fed anticipates new jobs data for December. Furthermore, policymakers are factoring how the incoming Trump administration may influence the economy, particularly regarding potential tariff impacts.

Waller cautioned that increased tariffs “raise the possibility that a new source of upward pressure on inflation could emerge in the coming year,” but anticipates that this would not lead to a sustained increase in price pressures, thus being unlikely to sway his view on monetary policy.

Uncertainties surrounding Trump’s policies complicate predictions for the year ahead, including the effects on import prices and labor supply due to potential stricter immigration and deportation policies.

While Waller does not foresee the most severe policies from the incoming Trump administration, he acknowledged the complexity of drafting December economic projections.

> “I have no idea what is coming,” he concluded.