Inflation Remains Sticky, Reinforcing Fed's Wait-and-See Approach
The Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred inflation gauge, showed prices remaining entrenched in December 2024. The "core" PCE index, which excludes volatile food and energy costs, increased by 2.8% year-over-year, matching November's reading.
On a month-over-month basis, core PCE rose by 0.2%, slightly faster than the 0.1% gain in November. These figures align with market expectations.
The latest inflation data adds to the Fed's decision to pause interest rate cuts this week, its first pause after three consecutive cuts late in 2024.
The pause reflects the central bank's growing caution, as it monitors both inflation and uncertainties surrounding the Trump administration's economic policies. Fed officials have expressed concern over persistent inflation and its potential impact from tariffs, immigration policies, and tax cuts.
In December, officials reduced their projection of rate cuts this year from four to two. Fed Governor Michelle Bowman stated that she wants to see progress in reducing inflation before making further adjustments to the target range.
Bowman expects inflation to decline by year-end despite the possibility of a "bumpy and uneven" trajectory. She highlighted that she remains wary of inflation risks, particularly with the labor market near full employment.
Analysts predict that the Fed has completed its rate-cutting cycle for the year. Fed Chair Jerome Powell emphasized that the central bank requires further progress in inflation reduction before taking further action.
Powell noted that with the policy stance less restrictive than before and a strong economy, the Fed can afford to be patient.
Bowman raised concerns that relaxed financial conditions could hinder inflation reduction progress. She closely monitors rising longer-term Treasury yields, which reflect investor fears of a sustained period of higher interest rates to curb inflation.
The Fed's gradual approach to rate adjustments provides time to assess the effects of the Trump administration's policies on the economy. Bowman stressed the importance of understanding these policies and their implementation for informed decision-making.