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December 23, 2024
DOW: 42,714
S&P: 5,936
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Source: CNBC
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Federal Reserve officials are closely watching how inflation shapes up as they decide when and how much to cut interest rates in 2025, and the latest inflation data offers reasons for both concern and hope.
The central bank’s preferred inflation measure, known as the P.C.E, was released on Friday, and it climbed by 2.4 percent in November from a year earlier, faster than its 2.3 percent rate in October and notably quicker than the central bank’s 2 percent target.
And after stripping out food and fuel costs, both of which bounce around from month to month, “core” inflation was 2.8 percent, in line with its previous reading.
The stickiness in yearly inflation served as a reminder that bringing price increases back to a normal pace remained a bumpy and incomplete project.
But the details of the report were more encouraging. On a monthly basis, both overall and core inflation climbed 0.1 percent — slightly less than what economists had expected, and slower than in October. That suggested that progress on inflation had not stalled quite as much as expected.
In all, the fresh inflation figures probably reinforce both the Fed’s cautious stance and a widespread belief among its policymakers that inflation will eventually slow further.
This report is not going to change their minds for next year and while the monthly slowdown was encouraging, officials will be keenly focused on the inflation outlook for 2025.
Fed officials raised interest rates sharply in 2022 and 2023 to try to wrestle price increases back under control. But months of progress on inflation and signs of a slowdown in the job market spurred them to lower borrowing costs starting in September. Policymakers have reduced rates three times as of their meeting last week, lowering them by a full percentage point in total.
Now, the next phase of monetary policy is much more uncertain. Officials are unsure how much more they should lower interest rates as inflation proves stubborn and as the job market shows signs of stabilizing. They have been clear that they will focus intently on the pace of price increases as they contemplate future rate cuts, which are likely to be fewer and farther next year.
Fed officials last week made predictions that forecast just two rate cuts in 2025, which caused stock prices to collapse last Wednesday, which was a shift in tone after weeks of optimism among investors. Higher interest rates could cost companies and consumers, cool the economy and dim the outlook for many riskier asset classes.
“The slower pace of cuts for next year really reflects both the higher inflation readings we’ve had this year, and the expectation inflation will be higher,” Jerome H. Powell, the Fed chair, said at his news conference last week.
“We’re going to be looking for further progress on inflation, as well as continued strength in the labor market,” he added. “And as long as the economy and the labor market are solid, we can be cautious.”
Friday’s P.C.E. report suggested that the economy did retain momentum: Consumers were spending at a solid clip. After adjusting for inflation, personal consumption climbed 0.3 percent from a month earlier, faster than 0.1 percent in October.
A broad range of evidence has suggested that Americans have remained willing to open their wallets this holiday season. Early reports on seasonal shopping suggest that it has done well, even as some consumers are more conscious of their budgets.
John Williams, the president of the Federal Reserve Bank of New York, said during an interview on CNBC last Friday morning that he still thought that interest rates were “restrictive,” meaning that they were weighing on the economy and should pull inflation down over time. But he also highlighted that the economy was facing unknowns as it headed into 2025.
“There is a lot of uncertainty right now,” Mr. Williams said.
Fed officials are trying to figure out how tariffs from the incoming new administration may affect the economy and how much they may push up inflation. But there are many unknowns such as like how extensive the tariffs will be and how other countries will react.
Given that, the Fed is planning to wait and see both how policies shape up and how the economy progresses, moving more gradually with policy.
“The next phase is really looking at the incoming information,” said the president of the Federal Reserve Bank of San Francisco in an interview on Friday morning before the release.
The president of the Federal Reserve Bank of Cleveland was the one official who voted against the Fed’s decision to cut interest rates last week. She said that it had been a close call.
“I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2 percent objective,” she wrote. “The economy’s momentum and recent elevated inflation readings caused me to revise up my inflation forecast for next year.”
Now, the Fed will be in waiting as it heads into the new year.
“It’s been a bit of a bumpy journey,” Mr. Williams said. “We’re still not to our 2 percent goal. We’re going to make sure we get there.”
