Inflation Remains 'Sticky,' Reinforcing Fed's Cautious Stance on Rates
The latest reading from the Federal Reserve's preferred inflation gauge indicates that prices remained firm in December 2024. This data point reinforces the Fed's current wait-and-see approach to interest rates.
The "core" Personal Consumption Expenditures (PCE) index, which excludes food and energy costs, rose 2.8% year-over-year in December, unchanged from November. On a month-over-month basis, core PCE increased 0.2%, slightly faster than the 0.1% gain seen the previous month.
These figures align with Wall Street expectations and suggest that inflation is not showing significant swings. The Fed's decision to hold rates steady this week marks its first pause after three consecutive rate cuts in late 2024.
The central bank is adopting a more cautious stance, monitoring inflation while also considering uncertainties surrounding the new Trump administration's economic policies. Fed officials have expressed concerns about persistent inflation and its potential impact from factors such as tariffs, immigration policy, and tax cuts.
Fed Governor Michelle Bowman emphasized the need for progress in lowering inflation before further adjustments to the target range. She anticipates that inflation will gradually decline, but progress may be uneven. Data from the first quarter will provide valuable insights into the pace of improvement.
Bowman noted that ongoing financial conditions may have hindered inflation reduction efforts. She expressed concerns about the rise in longer-term Treasury yields, which could reflect market expectations of higher interest rates for an extended period.
By slowing the pace of rate cuts, the Fed gains time to assess the impact of the Trump administration's policies on the economy. Increased clarity on these policies and their actual implementation will be crucial, Bowman said.