At his Parisian bakery, pastry artisan Arnaud Delmontel meticulously prepares the dough for croissants and chocolate-filled pastries, which later emerge from the oven with a golden hue and an enticing aroma. However, the cost of butter, a crucial ingredient in these delicacies, has seen a significant increase in recent months, with a 25% surge since September alone, according to Delmontel.

Despite this, he remains steadfast in his commitment to using butter, unlike some of his peers who have opted for margarine in their pastries. "It's a distortion of what a croissant is," Delmontel asserts. "A croissant is made with butter."

The simple delight of butter on warm bread or its rich flavor enhancing cakes and meats has become more expensive across Europe over the past year. This increase in butter prices is yet another challenge for consumers looking to bake holiday treats, following a period of post-pandemic inflation exacerbated by the conflict in Ukraine.

Across the 27-member European Union, the average price of butter increased by 19% from October 2023 to October 2024, with particularly sharp increases of 49% in Slovakia, and 40% in Germany and the Czech Republic, as reported to The Associated Press by the EU's executive branch. Individual country reports indicate that these costs have continued to rise in the months since.

In Germany, a 250-gram block of butter now typically retails for between 2.40 and 4 euros, or approximately $2.49 to $4.15, depending on the brand and quality. The price hike is attributed to a global milk shortage resulting from reduced production, including in the United States and New Zealand, one of the world's leading butter exporters, according to economist Mariusz Dziwulski, a food and agricultural market analyst at PKO Bank Polski in Warsaw.

European butter typically has a higher fat content compared to its American counterpart and is sold by weight in standard sizes, making it impossible for food producers to mask price increases by reducing package sizes—a practice known as "shrinkflation."

The butter shortage in France during the 19th century led to the invention of margarine, but the French remain among the continent's most avid consumers of butter, incorporating it generously in baked goods and sauces. In Poland, butter is so important that the government maintains a strategic reserve, alongside national gas and COVID-19 vaccines. The government recently announced the release of approximately 1,000 tons of frozen butter to stabilize prices.

The price of butter in Poland rose by 11.4% between early November and early December, and by 49.2% over the past year to nearly 37 Polish zlotys, or about $9 per kilogram, according to the National Support Center for Agriculture, a government agency. "Every month butter gets more expensive," remarked Danuta Osinska, a 77-year-old Polish woman, while shopping at a discount grocery store in Warsaw. She and her husband are fond of butter in various dishes but struggle to afford it on their modest pensions, leading them to consume less butter and more margarine, despite the inferior taste.

The rising cost of butter in Poland has become a political issue, with presidential elections scheduled for next year. Critics of centrist Prime Minister Donald Tusk and his Civic Platform party are attempting to attribute blame to them. Other Poles point fingers at the national bank's governor, who is from a different political faction. Some consumers base their shopping decisions on butter prices, leading to price wars between grocery chains that have, in some instances, kept prices artificially low in the past, to the detriment of dairy farmers, according to Agnieszka Maliszewska, director of the Polish Chamber of Milk.

Maliszewska believes that domestic, EU-specific, and global factors contribute to butter inflation. She argues that the primary cause in Poland is a shortage of milk fat due to dairy farmers closing their businesses because of slim profit margins and the hard work involved. Other factors cited include increased energy costs due to Russia's war in Ukraine, which impacts milk production. There is some debate about the potential impact of climate change, with Maliszewska not seeing a connection. However, economist Dziwulski suggests that droughts may be reducing production and that falling milk prices last year discouraged investments, leading dairy producers in the EU to produce more cheese for better profitability.

An outbreak of bluetongue disease, a viral disease transmitted by insects and harmless to humans but potentially fatal for sheep, cows, and goats, may also play a role, according to Dziwulski. The U.S. experienced a butter price spike in 2022, with the average price jumping 33% to $4.88 per pound over the course of the year, as dairy farmers grappled with feed costs and hot temperatures. U.S. butter prices fell in 2023 before rising again this year, reaching a peak of $5 per pound in September. Higher grocery prices in general affected U.S. voters during the presidential election in November.

Southern European countries, which rely more heavily on olive oil, are less affected by butter inflation—or perhaps they simply do not consider it as significant since their consumption is much lower. Since last year, the cost of butter has increased by 44% on average in Italy, according to dairy market analysis firm CLAL. Italy is Europe's seventh-largest butter producer, but olive oil is the preferred fat, even for some desserts, so the price of butter does not cause the same level of concern as it does in parts of Europe where butter is more popular.

Delmontel, the Parisian pastry chef, notes that the rising costs put pressure on business owners like himself. In addition to refusing to substitute margarine for butter and not reducing the size of his croissants, some other French bakers are making smaller pastries to manage costs. "Or else you squeeze it out of your profit margin," Delmontel said.

On Wednesday, the Federal Reserve made a significant monetary policy decision by reducing interest rates by 25 basis points, marking the third consecutive rate decrease since the initiation of easing measures in September. This latest adjustment has positioned the central bank's key lending rate within a range of 4.25% to 4.5%, the lowest it has been in two years.

The Federal Reserve's decision to lower interest rates reflects its ongoing response to the complex economic landscape in the United States. The central bank is balancing the need to support economic growth and labor market vitality against the persistent challenge of inflation remaining above its target. This latest move continues the easing trend initiated in September, aiming to provide additional stimulus to an economy that has shown remarkable resilience despite higher borrowing costs.

The Rate Cut Decision: A Closer Call

The choice to lower rates was not a unanimous one, reflecting the ongoing debate on how to alleviate the strain on the U.S. economy from high interest rates while maintaining the vitality of the labor market. Federal Reserve Chairman Jerome Powell characterized the most recent rate reduction as "a closer call," highlighting that recent inflation data was "the single biggest factor" influencing the policymakers' deliberations. Cleveland Fed President Beth Hammack was the sole dissenting voice, advocating for the maintenance of the current rate levels.

The mixed opinions among policymakers underscore the delicate balance the Federal Reserve is trying to achieve. While some officials are concerned about the potential negative impacts of high interest rates on economic growth and employment, others are more focused on ensuring that inflation is brought under control. The decision to lower rates by 25 basis points represents a cautious approach, aiming to support the economy without exacerbating inflationary pressures.

Economic Projections and Future Policy Path

The Federal Reserve's policy statement indicated a preference for stability in interest rates moving forward, given that inflation has remained stubbornly above the central bank's 2% target. The U.S. economy has demonstrated remarkable resilience despite higher borrowing costs, which has provided some reassurance to the Fed that it can maintain a steady stance without incurring significant economic harm. The Fed's latest forecasts predict only two rate reductions for the coming year, a reduction from the four that were anticipated in September.

Policymakers also project a slightly stronger economic growth, marginally lower unemployment rates, and anticipate that inflation will be higher in 2025 than previously estimated. These projections collectively suggest that Fed officials are expecting a robust U.S. economy in the next year, with no signs of an impending recession. They anticipate that inflation will reach their target over an extended period, not reaching 2% until 2027.

The Federal Reserve's updated economic projections indicate a more optimistic outlook for the U.S. economy. Despite persistent inflationary pressures, the central bank believes that the economy can continue to grow at a healthy pace while gradually making progress toward the inflation target. This balanced approach reflects the Fed's commitment to supporting economic activity while remaining vigilant about inflation.

Market Reactions and Future Uncertainties

Powell praised the U.S. economy's performance in his post-meeting press conference, stating that its strength has been "the story" of the year. His affirmation of the likelihood of fewer rate cuts next year, as indicated by the projections, caused a stir in the markets, with the Dow Jones Industrial Average plummeting by over 1,000 points. Some investors are optimistic about the prospects of robust growth in the coming year, which could be spurred by the policies of President-elect Donald Trump.

The incoming administration has pledged to extend the 2017 tax cuts and reduce regulations—measures that could stimulate growth if enacted. However, Trump's threats of imposing substantial tariffs on goods from Mexico, Canada, and China could disrupt the balanced economy that the Fed has observed thus far, as the high tariffs proposed by Trump are widely expected to trigger inflation.

A former Federal Reserve president has stated that the U.S. economy has already achieved the exceptionally rare feat of a "soft landing"—a scenario in which inflation is controlled without a recession—and that the challenge now is to sustain it. Here are the key takeaways from the Fed's third consecutive rate cut:

The U.S. economy is widely expected to remain robust next year, according to the Fed's own estimates and those of other economists. While Trump has indeed proposed plans that could transform the economy, such as high tariffs and mass deportations, it will generally take time for these plans, if enacted into law, to impact the broader economy. For now, the Fed envisions a strong U.S. economy with some persistent price pressures in 2025.

"I think that the slower pace of cuts for next year really reflects both the higher inflation rate this year and the expectation that inflation will be higher," Powell said. The Fed leader mentioned that some officials have already begun to factor potential changes in trade policy into their economic models. Officials regularly conduct simulations to understand what the future of the economy might look like.

In September 2018, when the first Trump administration embarked on a tariff spree, imposing duties on foreign goods ranging from solar panels to washing machines, a Fed simulation deemed it appropriate to raise rates if foreign countries imposed retaliatory tariffs and if Americans also anticipated an increase in inflation, according to a declassified 2018 Fed document detailing policy alternatives known as the "tealbook."

Powell continued to express that there are still many unknowns regarding Trump's tariff plans, such as which goods will be subject to tariffs and the duration of any duties, stating that it "is not a question that's in front of us right now." He did not rule out a rate hike in 2025.

Powell on U.S. Economic Growth and the Labor Market:

U.S. economic growth this year has been healthy, driven by American consumers continuing to spend. Consumer spending, which accounts for approximately two-thirds of the U.S. economy, has been bolstered by a steady job market with historically low unemployment rates. Businesses have also continued to invest in their operations throughout the year, according to data from the Commerce Department. Powell stated that this persistent strength has been a key reason why long-term interest rates, tied to the benchmark 10-year U.S. Treasury yield, have trended upward since the Fed's first rate cut in September. This includes mortgage rates.

"Most forecasters have been calling for a slowdown in growth for a very long time, so we're now well into another year of growth" that appears strong, he said. "The U.S. economy is just performing very, very well." Powell had a measured tone when discussing the labor market, noting that it "is still cool by many measures" but "not cooling quickly or in a way that really breaks."

He said that the labor market is not a source of inflation pressure, adding that the Fed is not aiming for any further softening in activity, which could be either higher unemployment or slower monthly job market growth. "This is a good labor market and we want to keep it that way," Powell said.

Overall, the U.S. economy remains in good health, but high inflation is not yet a thing of the past. Recent inflation readings have shown persistent price pressures in housing and an increase in prices for food and some goods. When considered together, economic data provides a strong argument for the Fed to maintain steady rates until inflation's downward trend resumes. The officials' latest projections indicate that inflation will not reach the Fed's target until 2027, a year later than their previous estimates.

Conclusion: Navigating the Path Ahead

The Federal Reserve's decision to lower interest rates for the third consecutive time reflects its careful consideration of the current economic conditions and future outlook. While the U.S. economy has demonstrated remarkable resilience, the central bank remains vigilant about inflationary pressures and the need to support sustainable growth. The path forward for monetary policy will depend on how economic data evolves, particularly regarding inflation and labor market dynamics. The Fed's commitment to maintaining a balanced approach ensures that it can respond appropriately to any changes in the economic landscape while working towards its dual mandate of maximum employment and price stability.