Preamble: Unfortunately, the December FRB-US SEP-consistent database has not yet been published, so we are unable to update the baseline. We will provide an update as soon as the Board releases the new dataset.
Wait and See.
Data since the December FOMC meeting have been broadly in line with expectations, or slightly weaker on the prices front. The overall picture remains unchanged: our models continue to project core PCE inflation as sticky and slightly above target. Moreover, there is still considerable uncertainty surrounding tariffs and other major macroeconomic policies. Given this backdrop, in our view, it seems likely that the Fed will adopt a wait-and-see approach. The January FOMC meeting is unlikely to bring any significant changes.
(Note: The current baseline does not yet incorporate any tariffs, as it remains unclear if, when, and to what extent they will be implemented.)
Main points:
- Recent data have been slightly weaker than expected (by about one-tenth due to rounding) compared to the Fed staff forecast inferred from the latest FOMC minutes. There has been no improvement in the distribution of price changes, which remains inconsistent with the inflation target.
Figure 1. Core CPI MoM prices change distributions.
- The main medium-term model forecast is little changed. The “main” model forecast (sample ends in Q4) continues to project core inflation to gradually moderate. The (Q4/Q4) model forecast is: 2.4% in 2025, 2.4% in 2026, and 2.3% in 2027. The forecast remains higher than the Fed target (although at this point the disagreement between the model and the SEP is mainly in 2027).
Figure 2. Current and previous FOMC round “main” model forecast of core PCE price inflation.
- The estimate of “underlying inflation” (pi*), the crucial variable in the Fed staff forecast, is little changed. According to our models, the Fed staff is estimating pi* at 2.4 percent. Pi* is very persistent by nature and remains above the Fed target.
Figure 3. Evolution of the estimate of pi*.
- FRB-US. Unfortunately, the December FRB-US SEP-consistent database has not yet been published, so we are unable to update the baseline. We will provide an update as soon as the Board releases the new dataset.
Path of the Federal Funds (FF) rates. All policy rules indicate that the Fed is likely to cut the FF rate again in 2025—unless core PCE inflation stays close to 3%. The FF rate path implied by the December SEP is below all rules. Inertial Taylor rules suggest the FF rate could remain above 4% through 2025, while non-inertial Taylor rules indicate it may end the year at or below 4%.
Figure 4. Taylor rules.
As usual, we would be more than happy to schedule a meeting to discuss the details.