By Howard Schneider

WASHINGTON (Reuters) – Strong U.S. economic and inflation data released on Friday reshaped the debate among Federal Reserve policymakers regarding the pace and extent of interest rate cuts. Investors have lowered their expectations for a rate reduction at the central bank's December meeting.

Fed officials maintain confidence that inflation is under control, suggesting that the central bank may lower its benchmark rate, currently in the 4.5% to 4.75% range, to a more neutral level over time. However, there is ongoing debate about the speed of these cuts and the definition of "neutral." Fed Chair Jerome Powell emphasized that the economy's robustness allows for a slower discussion.

The hesitancy about rapid rate cuts has increased, coinciding with political changes following Donald Trump’s recent presidential victory. As Wall Street considers potential inflationary pressures from the new Republican administration’s push for tax cuts and higher tariffs, investor confidence has wavered.

Boston Fed President Susan Collins stated that while urgency to lower rates is not immediate, a rate cut remains possible at the next meeting on December 17-18. "I wouldn’t take December off the table…" she told Bloomberg TV.

DATA SURPRISES TO UPSIDE, AGAIN

Recent data has been stronger than expected, with robust retail sales and rising prices for imports. Following the data release, the likelihood of a December rate cut dropped from 70% to around 60%.

Citigroup’s measure of data exceeding economists' expectations hit a seven-month high ahead of Friday’s retail sales figures. Chicago Fed President Austan Goolsbee noted that recent job reports may have been skewed by external factors, but he expects inflation to trend toward the Fed’s 2% target.

Goolsbee indicated rates could be lower over the next 12 to 18 months if progress continues. However, if policymakers disagree on the 'neutral' rate, it may be wise to slow the pace of rates adjustments to better assess their position. Fed projections from September indicated rates might fall to 2.9% by 2026, but investors now view rates being up to a full percentage point higher at that point.