Core PCE Inflation Steadies, Reinforcing Fed's Cautious Stance
The Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, remained elevated at 2.8% year-over-year in December 2024, matching November's level. On a monthly basis, core PCE rose 0.2%, surpassing Wall Street expectations.
The persistent inflation pressures have weighed on the Fed's decision-making. This week, the central bank opted to pause rate cuts after three consecutive decreases in late 2024. The pause reflects the Fed's caution as it monitors inflation and the uncertainties surrounding the Trump administration's economic policies.
Fed Governor Michelle Bowman emphasized the need for further progress in reducing inflation before considering additional rate adjustments. She cited ongoing concerns about potential risks from inflation and its interaction with potential tariffs, immigrant deportations, and tax cuts. Despite optimism that inflation will eventually decline, Bowman acknowledged the bumpy and uneven path ahead.
Some analysts believe the Fed's rate-cutting cycle may have come to an end. Bank of America economists have reiterated their view that the Fed will no longer cut rates this year. Fed Chair Jerome Powell has also stated that the central bank will require further evidence of inflation easing before making any further rate moves.
Bowman expressed concern that looser financial conditions over the past year might have slowed inflation reduction. She noted that rising Treasury yields indicate some investor apprehension about the Fed's long-term ability to contain inflation.
The Fed's slower approach to rate changes allows it to assess the impact of the Trump administration's policies on the economy. Bowman emphasized the importance of gaining clarity on the policies and their implementation to guide future decisions.