The Path of Federal Reserve Monetary Policy Allows for Greater Adjustment Flexibility

The core CPI hitting a four-year low undoubtedly provides the U.S. central bank—the Federal Reserve—with more room to adjust its policy. In recent years, the Fed mainly used interest rate hikes to curb inflation, but now that core inflation indicators are approaching the policy target, the Fed can reassess its monetary stance.
Historically, when core inflation declines consecutively, the Fed tends to ease monetary policy to stimulate economic growth. The current easing of inflation may prompt policymakers to consider cutting interest rates, slowing the pace of balance sheet reduction, or delaying further tightening. The market has already responded: the yield curve has adjusted, with long-term bond yields declining, reflecting an early market expectation of future easing.
However, the Fed needs to balance "economic growth and price stability" and cannot fully shift based on a single month’s data. Therefore, a more likely approach is "gradual adjustment." Policy statements or future meeting minutes may no longer emphasize "further rate hikes" but focus more on "data dependence" and "flexible adjustments." This change in wording is as significant as actual rate cuts in signaling to the market.
It is also important to note that monetary policy transmission has a lag; rate cuts or easing measures will not immediately change the economic structure. Therefore, the Fed will only take more explicit easing measures after confirming that inflation trends are stable.