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Why sticky inflation keeps the Fed's rate cuts on hold

Jerome Powell has spent the better part of 2024 preparing financial markets for lower borrowing costs, only to keep pushing the timeline further out as each inflation print lands above the comfort zone. Headline CPI has eased from its 2022 peak, but a stubborn band of services prices refuses to behave, leaving the Federal Open Market Committee reluctant to declare victory and trim its policy rate. Every delay feeds through to global funding markets, currency desks, and central bankers thousands of kilometres away reading the same data.

For Australian households and investors, the drama in Washington is not a distant spectator sport. Variable-rate borrowers here feel every shift in US policy through bank funding costs, the Aussie dollar, and the price at the bowser. With the Reserve Bank of Australia still watching its own inflation prints while keeping one eye on the Fed, the Pacific link is tighter than most people realise.

The patience test: what the latest US data is telling Powell

The core personal consumption expenditures index, the Fed's preferred gauge, has spent months drifting down only to stall around the 2.7% mark, well above the 2% target. Core CPI tells a similar story, with services excluding shelter now the biggest swing factor in Powell's risk assessments. Officials have repeated the phrase "more good data" so often it has become a market-moving keyword, signalling that a single soft month is not enough.

When the September dot plot dropped, traders had to reprice. Where four rate cuts had been penciled in at the start of the year, the median projection now implies just one before the year is out, with a slow glide path thereafter. Futures markets followed suit, pushing the first cut deeper into the calendar. Even when labour markets cool or growth wobbles, the committee appears unwilling to ease into an incipient reacceleration.

Powell has made clear that the bar is high because cutting prematurely risks unanchoring inflation expectations, a mistake the Fed is determined not to repeat after the 1970s experience. The result is a posture that looks hawkish in the short term but aims to be more durable later, a tradeoff the markets keep mispricing.

Where the stickiness lives in the inflation basket

Shelter remains the single largest item in core CPI, and the official measure still lags real-time rents by roughly a year because of how the survey is constructed. Owners' equivalent rent has begun to roll over, but only gradually, meaning shelter inflation will keep contributing positively through the back half of this year even as advertised apartment rents in major cities are falling.

The second source of persistence is what economists call supercore inflation: services excluding housing, energy, and food. Auto insurance premiums jumped double digits again, healthcare costs continued their steady climb, and education-related categories keep grinding higher. These items tend to reflect labour costs more than goods prices, which is why the supercore series moves with wage growth, not with oil or container freight.

Wage data from the employment cost index has moderated from the early 2020s surge but is still running above the pace consistent with 2% inflation. Until that gap closes, services pricing power will remain intact, and Powell's caution will look justified in hindsight. Goods disinflation has been the easy part; services are where the fight is.

Central banks compared: how the Fed stacks up against peers

The same stubborn core services story is playing out across most advanced economies, though with different timing. The ECB has already begun cutting and is further into the cycle, partly because eurozone demand has been weaker. The Bank of England sits in a similar holding pattern to the Fed, with services inflation still uncomfortably high despite a softer headline rate. Australia is closer to the Fed's camp, with the RBA having paused after its earlier tightening to assess how restrictive the monetary policy stance is feeding through to the domestic economy.

Central bank Policy rate Headline CPI Last move Outlook
Federal Reserve 5.25–5.50% ~2.9% Hold One cut or none this year
Reserve Bank of Australia 4.35% ~2.7% Hold Gradual easing later
European Central Bank 3.50% (deposit) ~2.0% Cut Further cuts priced
Bank of England 5.00% ~2.2% Hold Cautious easing path

The Fed clearly looks like the outlier among Pacific-facing central banks, with the RBA holding the line and the ECB moving earlier on its own cutting cycle. The common thread, however, is that none of them is in a hurry to declare mission accomplished on inflation.

What the delay means on the other side of the Pacific

Australian mortgage holders on variable rates have already weathered a generationally fast tightening cycle, and they are watching the Fed closely because Australian banks fund themselves partly in offshore wholesale markets. When US yields rise, the cost of those funds rises, even if the RBA keeps the cash rate steady. That is one reason the RBA has been more patient than markets expected: it knows the global rate pulse still matters for the spread between the official rate and what households actually pay.

At the petrol pump, the price swing is more direct. Australian drivers notice the cents-per-litre move within a fortnight of a US crude shift, and pump prices feed straight into monthly CPI prints. The link between global fuel benchmark trends and household budgets is one of the clearest inflation signals families can track themselves, even before the official figures land in Sydney and Canberra.

The Aussie dollar has traded in a narrow range against the greenback for most of the year, but a higher-for-longer US rate path tends to support the USD against the AUD, lifting the cost of imported goods and online subscriptions. Sydney and Melbourne property markets have already cooled from their 2022 peaks, but ongoing stickiness in financing costs keeps a floor under values that more aggressive Fed cuts would otherwise erode. Borrowers preparing for a refinance can use the latest RBA minutes and Treasury forecasts to gauge the path without waiting for the Fed to blink first.

Washington's risk premium: budget fights, shutdowns, and the bond market

US rate decisions rarely happen in a vacuum, and this cycle is colliding with another perennial headache: the recurring government shutdown threat. Continuing resolution deadlines have become a regular feature of the calendar, and each round of brinkmanship adds a risk premium to Treasury bill yields as investors price in delayed coupon payments and suspended reinvestment.

A government shutdown also blinds the Fed to the very data it relies on. The Bureau of Labor Statistics and the Bureau of Economic Analysis are among the agencies that stop publishing indicators during a funding lapse, leaving policymakers, journalists, and traders to argue over private-sector substitutes. The longer the impasse, the louder the calls for the Fed to look through the data noise, a stance it has so far resisted.

Treasury markets have absorbed these standoffs before without long-term damage, but the cumulative drift of fiscal signals is starting to matter for the term premium that mortgage rates and corporate borrowers ultimately pay. A Fed that needs reassurance from the data cannot easily cut through that fog, which is yet another reason Powell's patient language keeps pointing to a longer wait.

What to watch through the rest of the year

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