Fed again hoping for a pain-free landing from current inflation spike
SPY•Federal Reserve officials believe they can bring inflation down without damaging the job market, partly by shifting businesses’ price-setting expectations. The Fed projects PCE inflation will remain above its 2% target until 2029, while policymakers see no change in unemployment through that year.
1. Expectations over job losses
Fed officials see a gradual return to the 2% inflation target without a rise in unemployment, as businesses temper price increases when they expect inflation to fall. PCE inflation is 3.7%, while the jobless rate is 4.1%; officials consider the labor market near full employment and wage gains moderate.
2. Different views on demand
Some policymakers argue demand or output will have to weaken to bring inflation down, particularly if energy, tariff and other supply shocks persist. Chicago Fed President Austan Goolsbee said reducing demand also reduces output and employment, while St. Louis Fed President Alberto Musalem said a Phillips curve trade-off may not be necessary.
3. Rate path remains uncertain
The Fed’s September projections showed inflation above 2% until 2029 and policymakers divided over further rate increases beyond one more quarter-point hike this year. Investors expect three additional quarter-point increases through April. Officials say stronger demand, wage growth or inflation spreading beyond supply shocks could prompt a faster response.
