US Dec PCE Inflation Uptick Supports Fed Hold

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred measure of inflation, rose 2.6% in December from the year before, heating up from November’s 2.4% increase. This acceleration was in line with expectations, which called for a 2.6% annual increase, according to FactSet estimates. On a monthly basis, prices rose 0.3% as compared to 0.1% in November. Inflation has cooled substantially since peaking in the summer of 2022, and that progress continued through 2024 to the point where an elusive "soft landing”— price stability without having the economy tank into a recession — remained achievable as Joe Biden wrapped up his presidency.



The Fed's decision to hold interest rates steady at its January 29 meeting was widely expected, given the recent uptick in inflation and the uncertainty surrounding President Donald Trump's economic policies. The Fed has been reducing interest rates since September 2024, with three consecutive cuts totaling 50 basis points. However, with inflation still above the 2% target, the Fed may want to assess the trajectory of inflation and the impact of the new administration's economic policies before making further cuts.

Market participants and economists interpret the Fed's decision to hold interest rates steady as a sign of caution and a wait-and-see approach, given the uncertainty surrounding President Trump's economic policies and the potential impact of tariffs on inflation. The Fed may be concerned about the potential impact of President Trump's plans, such as adding new tariffs and widespread deportations of immigrants, which could both prove inflationary. If the Fed lowers rates further, inflation could tick up again, which would be counterproductive to the Fed's goal of achieving a 2% inflation rate.

In summary, the recent uptick in the PCE price index may lead the Fed to adopt a wait-and-see approach to interest rate adjustments in the near term, as it assesses the trajectory of inflation and the potential impact of the new administration's economic policies. The Fed's decision to hold rates steady suggests that it is waiting for more clarity on President Trump's economic policies and their potential impact on inflation. This uncertainty could lead to volatility in financial markets, as investors await further developments. The Fed's pause in rate cuts also suggests that it is not yet concerned about a potential economic slowdown, as it is not providing additional stimulus through lower interest rates.