Fed pause vs cut: how to tell what the Federal Reserve will do next

CME FedWatch is very accurate within a few days of a meeting but much less accurate months in advance. A single unexpectedly strong CPI or payrolls number can shift the probability from 80% cut to 50% cut overnight. FedWatch is best used as a real-time sentiment gauge, not a reliable forecast of decisions more than 4–6 weeks out. See the FOMC November event page for current probabilities.

Both measure underlying inflation excluding food and energy, but differ in methodology. Core PCE uses a chain-weighted basket that adjusts for consumer substitution. Core CPI uses a fixed Laspeyres basket. PCE also covers a broader range of goods and services. Structurally, PCE tends to run 0.3–0.5 pp below CPI. The Fed prefers PCE because it is less biased by substitution effects and covers the full scope of consumer spending.

Yes — and it has done so in 2024–26. The Fed cut in September 2024 when core PCE was still around 2.6%. The rationale: monetary policy works with a lag of 12–18 months. As long as core PCE is on a credible downward trajectory toward 2%, pre-emptive cuts are within the mandate. The risk is cutting too early and allowing inflation persistence to re-emerge.