New inflation data on Wednesday may give the Fed pause at its next policy meeting this month, although the new data did show some signs of easing.
On a "core" basis, excluding volatile food and natural gas costs, the consumer price index (CPI) rose 0.2% in December from the previous month, a slowdown from November's 0.3% monthly gain. On an annual basis, prices rose 3.2%.
It was the first drop in core interest rates after three months of stagnating at 3.3%.
"The latest inflation data confirms that the Fed skipped a rate cut at the January FOMC meeting," said EY Chief Economist Gregory Dako.
Alan Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the new policy "doesn't change expectations for a pause in rate hikes later this month, but it should curb some discussion of a potential Fed rate hike." .
The Fed's next meeting will be held on January 28-29, and investors are almost unanimous in believing that the central bank will keep interest rates unchanged after lowering them by a full percentage point in late 2024.
“We’re making progress on inflation, just very slowly,” former Fed economist Claudia Sam told Yahoo Finance on Wednesday. “There won’t be cuts later this month, but that doesn’t mean there will be cuts. It won’t happen later this year.”
Read more: How the Fed's interest rate decisions affect your bank accounts, loans, credit cards and investments
"While I expect deflation will progress, it will take time and the process is likely to be unstable," New York Fed President John Williams said after the consumer price index was released.
He added that the economic outlook "remains highly uncertain, particularly with respect to potential fiscal, trade, immigration and regulatory policies" - a reference to possible changes under the incoming Trump administration.
In recent weeks, many Fed officials have urged caution about future rate cuts.
In fact, the minutes of the Fed's December meeting showed that officials believed that inflation may take longer than expected to reach the 2% target, citing higher-than-expected inflation data since last fall and Trump's 2.0 new policy belt. Come risk.
They noted that "the likelihood of a sustained rise in inflation has increased," although they still expected the Fed to lower inflation to its 2% target "over the next few years," the minutes showed.
Several Fed members even said at that meeting that the deflationary process might be temporarily stalled, or pointed to the risks of that possibility.
Rising concerns about inflation help explain why Fed officials in December lowered expectations for two interest rate cuts in 2025, down from four previously.
Since inflation surged in 2024 and then fell again, inflation may show new signs of progress later in the first quarter of 2025 on year-over-year comparisons.
Fed Governor Michelle Bowman, perhaps the most worried Fed official, said last week that she would have supported a pause in rate hikes last month but supported a rate cut as a "final step" in the central bank's "policy adjustment."
"I believe we are approaching a stage where the economy needs neither restrictions nor support and policy should be neutral," said Jeff Schmid, president of the Kansas City Fed and a voting member of the Federal Open Market Committee this year.
Schmid said he favors a "gradual" adjustment in interest rates, noting that the strength of the economy allows the Fed to remain patient.
Boston Fed President Susan Collins, another voting member this year, also called for a gradual approach.
"As policy has moved closer to a more neutral stance, I think the nature of the current uncertainty is the need for a gradual and patient approach to policymaking," Collins said.
But George Catrambone, head of fixed income at DWS Group, said Wednesday's new data gave the Fed "a sigh of relief."
But there's still a lot of uncertainty ahead, and new policies from the Trump administration could affect the outlook.
As for when the Fed might cut interest rates for the first time in 2025, Catrambone added, "If Jackson Hole doesn't see it, it's not coming." He was referring to the Fed's annual event in late August.
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