Fed interest rate cut expectations resurface, can 3% inflation become a policy turning point

Federal Reserve official Musailem stated today that the current inflation level is closer to 3% rather than 2%, but expects it to decline this year, while also noting that the labor market is cooling in an orderly manner. This statement, on the eve of the upcoming December CPI data release in the US, sends a key signal to the market: although the Fed remains cautious about inflation, expectations for rate cuts have not completely disappeared.

Musailem’s Inflation Assessment

As a 2028 FOMC voting member and President of the St. Louis Fed, Musailem’s views represent an internal Fed assessment of the inflation situation. The phrasing that inflation is “closer to 3% rather than 2%” is significant—it acknowledges that inflation remains above the Fed’s 2% target but also implies that inflation is not entirely out of control.

The Meaning of 3% Inflation

Compared to the market’s previous expectation that inflation might be around 2.5%, Musailem’s 3% estimate is somewhat conservative. This indicates a more cautious view of inflation stickiness, possibly reflecting concerns over structural factors such as commodity prices and services sector inflation.

Signal of Expected Decline This Year

The key phrase is “expected to decline this year.” This suggests that Fed officials are optimistic about the long-term trend of inflation, rather than believing it will remain high indefinitely. It leaves room for expectations of rate cuts.

Comparison with Other Fed Officials’ Stances

These two officials’ statements form an interesting contrast. Williams previously indicated no reason to cut rates soon, signaling a hawkish stance and strengthening the dollar. Musailem’s comments, on the other hand, open the door to rate cuts—though he didn’t explicitly say so, the expectation that “inflation will decline this year” inherently contains a potential for future policy adjustments.

How Should the Market Interpret This

The Fed’s True Attitude

Musailem’s views reflect genuine internal disagreements within the Fed. It’s not a single, clear policy signal but rather a balancing act among inflation, employment, and economic growth considerations. His emphasis on the labor market “cooling in an orderly manner” suggests that the Fed sees increasing chances of a soft landing.

Impact on Rate Cut Expectations

Based on breaking news and related information, today is a day of dense Fed policy signals. The US December CPI data was released today at 21:30, and Musailem’s speech will be at 23:00. The combination of these events will reshape market expectations regarding the Fed’s rate path.

If CPI comes in below expectations, coupled with Musailem’s view that “inflation will decline this year,” it could reinforce rate cut expectations, benefiting risk assets like cryptocurrencies. Conversely, if CPI exceeds expectations, it may weaken these expectations.

Implications for the Crypto Market

Rising expectations of rate cuts generally benefit risk assets like Bitcoin. When the Fed signals that “inflation is under control and rate cuts are possible,” the low-interest-rate environment tends to attract funds back into high-risk, high-reward assets. However, all this depends on CPI data providing sufficient support.

Summary

Musailem’s remarks mark a rethinking within the Fed regarding policy direction. While he did not commit to an immediate rate cut, his assessment that “inflation is around 3% and expected to decline this year,” combined with the orderly cooling of the labor market, creates conditions for a revival of rate cut expectations. The viewpoints of hawkish officials like Williams and relatively dovish ones like Musailem will ultimately be tested by upcoming data. Today’s CPI release and Musailem’s speech could be pivotal turning points for market trends in the coming weeks.