The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) index, rose a modest 0.1% in November, defying economists' expectations of a 0.2% increase. While this signals a slight easing in monthly inflation pressures, the annual inflation rate edged up to 2.4% from 2.3%, moving further from the Fed’s 2% target.
Core PCE Remains Elevated
- The core PCE index, which excludes volatile food and energy prices, also climbed 0.1% in November.
- Over the past 12 months, core PCE inflation remained steady at 2.8%, underscoring persistent inflationary pressures.
Fed's Adjusted Outlook
This inflation data comes shortly after the Fed’s final 2024 meeting, during which officials revised their forecasts:
- Inflation is now expected to settle at 2.5% by the end of 2025, slightly higher than prior estimates.
- The central bank has tempered its plans for rate cuts, aiming for just two reductions in 2025, down from an earlier forecast of four.
Fed Chair Jerome Powell reiterated the importance of balancing inflation control with economic stability. "Rates are still high enough to slow inflation," Powell said, but added that lowering borrowing costs is crucial to avoiding a significant rise in unemployment.
Market Impact and Investor Sentiment
The Fed’s more cautious approach sparked a selloff earlier this week, marking the worst one-day decline in monthsfor U.S. stocks. Investors are now recalibrating their expectations, with no further rate cuts anticipated until spring 2025.
Premarket trading on Friday indicated continued downward pressure on major indices, with DJIA and S&P 500 futures both pointing to a weaker open.
Key Takeaways
- The Fed faces a delicate balancing act as inflation remains above its target while unemployment looms as a potential concern.
- Markets are bracing for a prolonged period of higher interest rates as the Fed adopts a cautious stance on further easing.
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