Inflation Remains Sticky, Reinforcing Fed's Wait-and-See Approach
The latest reading from the Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, shows prices remaining elevated in December 2024. The index rose 2.8% year-over-year, unchanged from November.
On a month-over-month basis, core PCE increased by 0.2%, above the 0.1% increase seen in November. These figures align with market expectations.
The data suggests that inflation is not showing significant movement, reinforcing the Fed's decision to pause interest rate cuts at its recent meeting. The central bank is adopting a cautious approach, monitoring inflation and the potential impact of the Trump administration's economic policies on inflation.
Fed officials have expressed concern about persistent inflation, particularly in light of potential tariffs, immigration policies, and tax cuts. In December, the Fed lowered its expected rate cuts this year to two from four.
Fed Governor Michelle Bowman emphasized the need to see progress in reducing inflation before making further adjustments to interest rates. She preferred a gradual approach to future policy rate changes.
Bowman acknowledged that inflation is likely to decline by year-end but cautioned that the path may be "bumpy and uneven." She highlighted risks to inflation, especially with the strong job market.
Analysts believe the Fed has paused its rate-cutting cycle. Bank of America economists predict that "the cutting cycle is over."
Fed Chair Jerome Powell stated that the Fed will need to see more evidence of inflation falling before moving again on rates.
Bowman expressed concern that easier financial conditions may have slowed the pace of disinflation. She is also monitoring the rise in long-term Treasury yields, which could indicate investors' concerns about higher interest rates for longer.
The Fed's cautious approach allows it to assess the effects of the Trump administration's policies and gain greater clarity on the economy's response.