Fed Holds Fire, Keeps Eye on Inflation and Trump Policies
The Federal Reserve's preferred inflation gauge, the "core" Personal Consumption Expenditures (PCE) index, held steady in December, remaining at 2.8% year-over-year. This aligns with Wall Street expectations and reinforces the Fed's cautious wait-and-see approach to interest rates.
The core PCE index saw a 0.2% increase month-over-month, faster than the 0.1% seen in November. These figures suggest that inflation is not experiencing significant upward or downward pressures.
The Fed recently paused its interest rate cuts after three consecutive decreases in late 2024. This pause reflects the central bank's cautious stance, balancing concerns about persistent inflation with uncertainties surrounding the Trump administration's economic policies.
Fed Governor Michelle Bowman emphasized the need for further progress in lowering inflation before adjusting interest rates. She also expressed confidence that inflation will decline over time, albeit potentially unevenly.
Some analysts believe the Fed has ended its rate-cutting cycle for the year. Fed Chair Jerome Powell previously stated that further progress in inflation reduction is necessary before adjusting rates again.
Bowman expressed concern that the gradual increase in Treasury yields reflects market fears that the Fed may need to maintain higher interest rates for an extended period to curb inflation.
The Fed's cautious approach allows it to assess the impact of Trump administration policies on the economy. Bowman stressed the importance of understanding these policies and their implementation in order to make informed decisions about interest rates.