Quick Overview Summary

  • The Federal Reserve's preferred inflation gauge was largely flat in December, in line with policymakers' expectations and reinforcing their decision to keep the benchmark interest rate unchanged in the near term.
  • Excluding volatile food and energy prices, the core Personal Consumption Expenditures (PCE) price index rose 0.2% month-over-month and 2.8% year-over-year, the Bureau of Economic Analysis reported on Friday. This increase is above the Fed's 2% target but aligns with forecasts from Fed Chair Jerome Powell.
  • "Core inflation remains elevated, but I expect it to slow further this year," Fed Governor Michelle Bowman said in a speech on Friday. "I still see upside risks to inflation," she said, calling for "a cautious and gradual approach to policy adjustments."

Deep Insights

Fed policymakers, noting solid economic growth and inflation above target, unanimously decided on Wednesday to hold the federal funds rate in a range of 4.25% to 4.5%. This follows three consecutive rate cuts last year that lowered the benchmark rate by a full percentage point.

Powell said repeatedly at the post-decision press conference that the central bank is in no hurry to resume rate cuts. Bowman also expressed a preference for patience.

"Before further adjusting the target range, I want to see progress on inflation coming down," Bowman said. "We need to focus on inflation, and the labor market appears to be in balance, with the unemployment rate remaining at historically low levels."

She noted that geopolitical tensions could push price pressures higher. "Global supply chains remain vulnerable to disruptions, which could lead to inflationary effects in food, energy, and other commodity markets," Bowman said.

Additionally, "pent-up demand released after the election, especially improvements in consumer and business confidence, could lead to stronger economic activity and thus increase inflationary pressures," Bowman said.

In fact, the Atlanta Fed predicted on Friday that GDP growth could accelerate to a 2.9% annualized rate in the current quarter. The Commerce Department reported Thursday that the economy expanded at a 2.3% annualized pace in the previous quarter, driven mainly by strong consumer spending.

Torsten Sløk, chief economist at Apollo Global Management, said in an email on Friday that multiple factors could spur stronger growth and push up price pressures in the coming months.

"The strength of the economy stems from high stock prices, high home prices, and strong growth tailwinds from tech capital spending, defense spending, and spending driven by the CHIPS Act, the IRA, and the Infrastructure Act," Sløk said.

"Add to that low unemployment claims and surging 'animal spirits' since the election, the bottom line is that the U.S. economy is entering 2025 with accelerating momentum," he added. "The narrative of a slowdown and inflation returning to 2% is wrong."

Powell said Wednesday that the Fed's pause in monetary easing does not commit to a preset path for borrowing costs, partly due to uncertainty over the economic impact of policy changes under the Trump administration.

"We don't know what will happen with tariffs, immigration, fiscal policy, and regulatory policy," Powell said. "We need to let those policies become clear before we can begin to make a reasonable assessment of their economic impact."