Confirmation Bias?
The key issue for US interest rates is how many rate cuts in 2025. At their recent meeting, the US Fed inferred two cuts, totaling .5% for 2025. The month before the estimate was for four cuts totaling 1%.
Expectations of US interest rates declining went down.
But hope springs eternal, and in this case, hope was the PCE, the consumer expenditure index, an index that excludes food and energy prices due to their volatility. The December PCE was .1% month over month versus a .3% forecast, showing a broad-based deceleration in prices.
This could be an argument for lowering interest rates.
But is it enough? Or are investors looking at it through rose colored glasses?
Is it confirmation bias, the tendency to interpret new evidence as confirmation of one's existing beliefs? Is that what this announced PCE is?
The Fed still must consider policy effects of the new administration, which could underpin inflation.
Other drivers of inflation may rear up too. It may be too early to conclude anything.
So, we can all agree that there is a high probability US interest rates will be cut in 2025. How many times? Two times? Four times?
Let us know what you think.
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