The Federal Reserve (FED) megaphone: December rate cut probability soars to 85%, core inflation is still cooling down.

As the end of 2025 approaches, the focus of discussions on Wall Street is not on Trump, but rather on Nick Timiraos, the chief economic reporter for The Wall Street Journal, who is referred to as the “Federal Reserve's mouthpiece.” He noted that although the Producer Price Index (PPI) jumped 0.3% month-on-month in September, core inflation momentum is still cooling, and the obstacles to a rate cut by the Federal Reserve in December are being removed piece by piece. The market has raised the probability of a rate cut by the Federal Reserve in December to around 85%.

Nick Timiraos interprets: PPI appears hot on the surface but cold underneath

(Source: The Wall Street Journal)

According to data released by the U.S. Bureau of Labor Statistics, the PPI in September rebounded due to energy and food, seemingly reigniting inflation. However, Timiraos emphasized that after stripping away the two volatile costs, the core PPI year-on-year growth rate still hovers between 2.6% and 2.9%. He reminded readers that the Federal Reserve is more concerned with the categories of services that will be included in the Personal Consumption Expenditures Price Index (PCE), such as healthcare and airfare, which were both “quite calm” in September.

According to the detailed analysis of producer prices, the price increases at the production end have not been successfully transmitted to the consumption end, allowing officials to view this wave of wholesale price fluctuations as temporary noise. This structural difference of “surface heat, internal cold” is key to understanding the current inflation dynamics. Energy prices fluctuate dramatically due to geopolitical and seasonal factors, while food prices are influenced by climate and supply chain issues, both of which are short-term disturbance factors. In contrast, inflation in the service sector is more persistent, reflecting wage growth and economic fundamentals, and thus is the main reference indicator for The Federal Reserve (FED) policy.

As the chief economic reporter for The Wall Street Journal, Nick Timiraos has maintained close communication with Federal Reserve officials over the years, and his reports often accurately reflect the internal policy tendencies of the Fed, which is why he is referred to as the “mouthpiece of the Federal Reserve” by the market. When Timiraos published an interpretation of the PPI data and emphasized that core inflation is moderate, the market immediately viewed it as an outward expression of dovish voices within the Fed, which is also an important catalyst for the rapid increase in the likelihood of a rate cut by the Federal Reserve in December.

The government shutdown creates a data vacuum that aids the argument for interest rate cuts

The recent federal government shutdown earlier this year has halted statistical agencies, causing a complete delay in the release of economic figures. Now, the Fed is preparing to hold the FOMC meeting on December 9-10, but it lacks new inflation readings for October and November, with only the PPI, which is two months old, available for reference. Timiraos pointed out in the report that this data vacuum actually weakens the hawkish argument against rate cuts: if the latest figures have not been released, it is difficult to prove that inflation has already rebounded.

Market discussions also pointed out that, in situations of incomplete information, officials are more inclined to take preventive actions rather than waiting for unexpected events to occur. This decision-making logic is not uncommon in central bank policies. When faced with uncertainty, if the existing data supports a rate cut and there is no clear counter-evidence, maintaining a wait-and-see approach may be riskier than taking action. If the Federal Reserve does not cut rates in December, and the subsequently released data shows that inflation is indeed moderate, it may be criticized for being overly cautious and missing the optimal timing.

The irony of this data vacuum is that it was supposed to increase policy uncertainty, but in reality, it has facilitated the argument for interest rate cuts. If hawkish officials want to oppose rate cuts, they need to provide evidence of inflation re-accelerating, but when the latest data is missing, they can only rely on old data, which happens to show cooling inflation. This “burden of proof reversal” has put doves in a favorable position in this policy debate.

Core PCE Expected 0.19% Provides Safety Window

According to estimates from Citigroup and Inflation Insights, the upcoming core PCE month-on-month growth rate for September may only be between 0.19% and 0.2%, with the year-on-year growth rate potentially further declining from 2.9% to 2.8%. If realized, this would confirm that inflation is back on track to the Fed's 2% target. Timiraos quoted internal thoughts from officials: “In the context of a weakening labor market and slowing core prices coexisting, the path of least resistance is easing.”

The PCE (Personal Consumption Expenditures Price Index) is the inflation indicator most closely watched by the Federal Reserve (FED), as it better reflects changes in consumers' actual spending patterns compared to the CPI (Consumer Price Index). Core PCE excludes volatile items such as food and energy, making it the best indicator for measuring underlying inflationary pressures. A monthly increase rate of 0.19% translates to an annualized rate of about 2.3%, which is slightly above but close to the Federal Reserve's (FED) long-term target of 2%. This level is considered an ideal state of 'neither too hot nor too cold'.

More importantly, the annual growth rate trend of 2.9% dropping to 2.8% shows that inflation is continuing to improve. Although there is still some distance to the 2% target, the direction is correct and the pace is steady. Against this backdrop, the Federal Reserve (FED) can moderately lower interest rates without worrying about uncontrolled inflation, providing more support for the economy. Labor market data also supports this narrative, as ADP data indicates that the average weekly employment number has decreased by 13,500 over the past four weeks, and the rising unemployment rate may suppress wage growth, thereby alleviating inflationary pressure.

Three Major Data Pillars Supporting the December The Federal Reserve (FED) Rate Cut

Core PPI Moderate: The annual growth rate remains at 2.6%-2.9%, and inflation in the service sector is “quite calm”.

Core PCE Expected to Slow: Month-on-month increase of 0.19%-0.2%, year-on-year increase may drop to 2.8%

Weakening Labor Market: Employment decreases and wage growth slows, leading to a decline in demand-driven inflationary pressures.

Three pillars form a complete logic chain for interest rate cuts: Prices on the production side have not been transmitted to the consumption side, inflation on the consumption side continues to improve, and a weak labor market ensures inflation will not accelerate again.

Market Bets and Trump Administration's Political Considerations

Capital flow indicators show that the bond yield curve quickly declined after the Timiraos report was released, indicating that traders are pricing in easing ahead of time. Although Fed Chair Powell publicly maintains a “data-dependent” stance, unless there is an unexpected surge in the PCE released on December 5, it will be difficult for decision-makers to find strong reasons not to cut interest rates. According to the CME FedWatch Tool, the probability of a rate cut in December has soared from 50% at the beginning of the month to about 75%, reflecting the market's reassessment of inflation data.

For the Trump administration, maintaining a moderate monetary environment helps avoid the economy falling into a hard landing in the early stages of a second term. Trump criticized the negative impact of high interest rates on the economy multiple times during his campaign and hinted at a desire for more loose monetary policy. Although the Fed emphasizes its independence, the combination of political pressure and economic reality makes interest rate cuts the path of least resistance. If the Federal Reserve chooses to remain inactive despite inflation data supporting a rate cut, it may face dual criticism from both the political arena and the markets.

For the Fed, a moderate release of interest rate pressure can leave a buffer zone for next year as inflation trends downward and employment slows. The current federal funds rate remains in the 4.75%-5.00% range, which still has a significant tightening effect relative to the neutral rate (around 3%). If the economy experiences an unexpected downturn in the coming months, the Fed needs enough room to cut rates in response. A 25 basis point cut in December would lower the rate to 4.50%-4.75%, reserving more flexibility for policy operations next year.

The market has bet on the interest rate range for the first quarter of next year at 3.50%–3.75%, which means the market expects that the Fed will cumulatively cut interest rates by 100-125 basis points from now until March next year. Although this expectation is aggressive, it is not entirely divorced from reality. If inflation continues to improve and the job market significantly weakens, the Fed may need to accelerate the pace of interest rate cuts to avoid an economic hard landing.

In summary, the rebound of the PPI is like a briefly surging wave crest, while the tide still flows towards a slowdown in inflation. Nick Timiraos, through the analysis of lagging data, paints a loose path for the market: as long as the next PCE does not “explode”, the rate cut button at the December meeting is very likely to be pressed.