Inflation Remains Sticky, Reinforcing Fed's Cautious Stance
Inflation remained elevated in December 2024, reinforcing the Federal Reserve's decision to pause rate hikes. The core Personal Consumption Expenditures (PCE) index, excluding food and energy, rose 2.8% year-over-year, unchanged from November. Month-over-month, it increased 0.2%, exceeding expectations.
This data aligns with the Fed's current wait-and-see approach after three consecutive rate cuts in late 2024. The central bank is monitoring inflation closely while assessing the potential impact of the Trump administration's economic policies on the economy.
Fed officials have expressed concerns about persistent inflation and its vulnerability to tariffs, immigration policies, and tax cuts. Governor Michelle Bowman emphasized the need for progress in reducing inflation before further adjustments to interest rates.
Despite acknowledging a potential decline in inflation later in the year, Bowman cautioned that progress may be inconsistent. She highlighted the importance of upcoming inflation data for the first quarter.
Analysts believe the Fed may have concluded its rate-cutting cycle. Fed Chair Jerome Powell indicated the need for further progress on inflation before resuming rate adjustments.
Bowman expressed concern that loose financial conditions could hinder inflation reduction. She also monitored rising long-term Treasury yields, highlighting investors' fears of sustained elevated interest rates.
The Fed's gradual approach to rate changes provides time to assess the impact of the Trump administration's policies on the economy. Bowman emphasized the importance of understanding the implementation and effects of these policies on economic growth.