Inflation Remains High, Fed Indicates Caution on Rate Hikes
The Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, remained elevated in December 2024, rising 2.8% year-over-year. On a monthly basis, core PCE increased by 0.2%.
Despite the lack of significant shifts in inflation, the Fed has adopted a wait-and-see approach to interest rates. This pause follows three consecutive rate cuts in late 2024.
The central bank's caution stems from ongoing concerns about inflation and uncertainties surrounding the economic policies of the Trump administration. Fed officials have expressed worries about the potential impact of tariffs, immigration restrictions, and tax cuts on inflation.
Fed Governor Michelle Bowman stated that she wants to see progress in lowering inflation before adjusting interest rates further. She believes that inflation will eventually decline but acknowledges that the path ahead may be uneven.
Analysts predict that the Fed may have completed its interest rate cuts for the year. Fed Chair Jerome Powell has indicated that the central bank needs to see sustained improvement in inflation before making further adjustments.
Bowman expressed concerns that easy financial conditions may have contributed to the slow progress in reducing inflation. She is also monitoring longer-term Treasury yields, which have risen amid fears that higher interest rates may be necessary to control inflation.
The Fed's gradual approach to rate adjustments allows it time to assess the Trump administration's policies and their impact on the economy.