A fresh reading from the Federal Reserve's preferred inflation gauge showed prices remained sticky in the final month of 2024, a new data point that likely reinforces a current wait-and-see approach to interest rates.
The "core" Personal Consumption Expenditures (PCE) index, which strips out food and energy costs, rose 2.8% over the prior year during the month of December — stuck at the same year-over-year level recorded in November.
On a month-over-month basis, "core" PCE rose 0.2%, faster than the 0.1% seen in November. The annual and monthly figures were in line with Wall Street expectations.
The new sign that inflation isn't making dramatic movements up or down comes after the Fed this week decided to keep rates on hold, its first pause following three consecutive cuts at the end of 2024.
The pause is part of a new caution on the part of the central bank as it keeps one eye on inflation and the other on several unknowns about the economic policies of the new Trump administration.
Many Fed officials have made it clear they are increasingly concerned about signs of persistent inflation and how that could be affected by potential tariffs, immigrant deportations, and tax cuts. In December, officials scaled back the number of estimated cuts this year to two from four.
Fed governor Michelle Bowman said in a new speech Friday in New Hampshire before the new inflation numbers were released that she would like to see progress in lowering inflation before making "any further adjustments to the target range."
"As we enter a new phase in the process of moving the federal funds rate toward a more neutral policy stance, I would prefer that future adjustments to the policy rate be gradual," Bowman said.
Though Bowman did say she thinks that inflation will begin to decline again and that by year end it will be lower than where it now stands.
Progress, she added, may be "bumpy and uneven,” and the upcoming inflation data for the first quarter will be an important indication of how quickly progress will happen. She underscored that she continues to see greater risks to inflation, especially while the job market remains near full employment.
Some analysts think the Fed is done cutting for the year.
"We remain comfortable with our call that the cutting cycle is over," Bank of America economists said in a research note Thursday.
Anticipating the December PCE inflation data earlier this week, Fed Chair Jerome Powell noted that the Fed would need to see more progress on inflation coming down before the Fed moved again on rates and that the central bank was going to take things slow.
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"With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance," Powell said Wednesday during a press conference.
For her part, Bowman said Friday she is concerned that easier financial conditions over the past year may have contributed to slow progress on bringing down inflation.
"In light of the ongoing strength in the economy and with equity prices substantially higher than a year ago, it seems unlikely that the overall level of interest rates and borrowing costs are exerting meaningful restraint," she said.
Bowman is also closely watching the increase in longer-term Treasury yields, noting that the jump in yields reflects some investors' fears that the Fed will have to keep interest rates higher for longer to bring down inflation.
A slower approach to lowering rates allows the Fed to get clarity on the Trump administration’s policies and their effects on the economy, Bowman added.
"It will be very important to have a better sense of the actual policies and how they will be implemented, in addition to greater confidence about how the economy will respond," she said.
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