Fed before interest rate decision: Tension despite inflation concerns

In the financial world, all eyes are on the upcoming meeting of the Federal Reserve, as forecasts suggest a possible interest rate adjustment. Despite ongoing inflation concerns that trouble the Fed, the market is betting that the central bank will lower the key interest rate next week. The recent increase in the annual inflation rate from 2.6% to 2.7% in November, as reported by the Consumer Price Index, raises questions about future interest rate policy. Inflation remains above the central bank's target of 2%, although recent data was within expectations. The CME Group's FedWatch tool indicates a 95% probability of an interest rate reduction at the central bank meeting next week. This potential decision reflects the Fed's confidence that inflation is on its way to a more stable 2%, even though it represents a bumpy return to pre-pandemic inflation levels. With a current interest rate of 4.50% to 4.75%, previously at a 20-year high, the Fed is considering a gradual reduction towards the end of next year. However, given the persistent inflation rates, expectations regarding the frequency of rate cuts may be adjusted. In September, economists predicted that the interest rate could be in the range of 3.25% to 3.5%, indicating four cuts of a quarter percentage point each. However, a recent comment by James Knightley, Chief Economist at ING, suggests that the Fed may now signal only three cuts in the coming year instead of four.