Given the health of the labor market, it is important to maintain the focus on returning inflation to 2 percent in a timely fashion. To accomplish this objective, I believe that monetary policy will need to remain modestly restrictive for some time. Based on my estimate that monetary policy is not far from a neutral stance, I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2 percent objective. In my mind, maintaining the target range for the federal funds rate at 4-1/2 to 4-3/4 percent at the December 2024 meeting was the best choice given the strength of recent economic data, accommodative financial conditions, and my forecast that inflation will remain somewhat above 2 percent over the next year amid a healthy labor market. The economy’s momentum and recent elevated inflation readings caused me to revise up my inflation forecast for next year. In addition, the balance of risks to the outlook appears to be skewed toward higher inflation outcomes. A stall in inflation above 2 percent for too long would risk de-anchoring inflation expectations, making it harder to return inflation to our objective.
