Inflation rises to 3.4%, unemployment expectations hit a 13-year low, and the Federal Reserve faces a dilemma in January's policy outlook

The U.S. economic data has sent a contradictory signal. According to the latest monthly survey from the New York Fed, consumer inflation expectations for December rose to 3.4%, while the estimated probability of finding a new job after unemployment fell to 43.1%, the lowest level since mid-2013. These two opposing indicators are causing confusion for the Federal Reserve’s policy decisions.

The Economic Reality Behind the Data

Rising Inflation Expectations Pressure

Consumers expect prices to increase by 3.4% over the next year, up from 3.2% in November. Although the increase seems modest, it indicates that inflation expectations are becoming more sticky. When consumers generally expect prices to rise, their spending and investment decisions will adjust accordingly, potentially pushing actual inflation higher. This often leads the Fed to maintain higher interest rates for a longer period.

Risks of Worsening Employment Outlook

The drop in the probability of finding a job after unemployment to 43.1% is an even more concerning signal. It suggests that consumer confidence in the labor market is declining, and they expect it to be harder to find work when unemployed. This deterioration in employment outlook may indicate a weakening labor market, which typically prompts the Fed to consider rate cuts to stimulate the economy.

The Fed’s Dilemma

These two data points create a classic policy dilemma. Fed officials are divided on the risks of inflation versus unemployment, directly influencing the policy adjustment later this month (expected in mid to late January).

Possible Policy Options

Based on current data, the Fed faces several choices:

• Hold Steady: Keep interest rates unchanged for now and observe upcoming economic data
• Limited Rate Cuts: If employment data worsens further, consider small rate cuts
• Maintain High Rates: If inflation pressures persist, continue with the current high interest rate level

Impact on the Cryptocurrency Market

The crypto market is highly sensitive to Fed policies. If the Fed accelerates rate cuts due to worsening employment prospects, risk assets like Bitcoin generally benefit. However, if rising inflation expectations cause the Fed to remain cautious, markets could face pressure.

The conflicting data means the market needs to wait for more signals to gauge the Fed’s true intentions. The January policy meeting and subsequent economic data will be key points to watch.

Summary

This survey from the New York Fed reflects a structural contradiction in the U.S. economy: inflation pressures have not fully abated, but signs of a weakening labor market are emerging. The Fed will face a real dilemma in its policy adjustments this month, and this uncertainty could increase market volatility in the short term. Investors should closely monitor Fed officials’ statements and upcoming data releases to assess the policy direction.