'Leap of faith' inflation rate will improve in next couple of quarters: Former Dallas Fed president

Monetary Policy Considerations - The Federal Reserve's upcoming decision is viewed as an agonizing one, with market probabilities at 50/50 [1][2] - The Fed funds rate is currently in a range of 3.75% to 4% [5][6] - Some believe the neutral Fed funds rate is much lower, potentially leading to a 50 basis point cut [6] - The real neutral Fed funds rate (adjusted for inflation) is estimated to be between 0.75% and 1% [7] - A neutral nominal Fed funds rate of 2.75% assumes inflation will return to 2%, but it's currently running at 2.75% to 3% [8] - Adding the current inflation rate (2.75% to 3%) to the real neutral rate (0.75% to 1%) yields a nominal rate of 3.5% to 3.75% [9] - The market is seeing more hawkish voices emerge because the Fed is closer to neutral, having already cut rates by 25 basis points in October [11] - The Fed needs to assess whether the labor market weakness is cyclical, due to the shutdown, or structural (mismatches between jobs and job seekers) [13] Economic Factors Influencing the Fed - Near-term tariffs are slowing growth [3] - Immigration policies and uncertainty around 12 to 15 million immigrants in the workforce are affecting supply and hurting growth [4] - The government shutdown has hurt growth, but its resolution will help [4][12] - Tailwinds in 2026 include the unwinding of the shutdown, tax incentives, and regulatory relief [4] - The AI data center power boom is considered near neutral on the Fed funds rate [5] - Inflation has been sticky and running 0.75% to 1% above target [12]