The Fed got the inflation reading it wanted. When cuts begin is still a tossup.The Federal Reserve got the inflation reading it wanted. When the central bank could begin cutting rates is still a toss-up.
The Fed’s preferred inflation measure — a “core” Personal Consumption Expenditures index that excludes volatile food and energy prices — clocked in at 2.9% for the month of December, beating estimates.
That marked the first time the gauge fell below 3% since March 2021 — well before the central bank began its most aggressive rate-hiking campaign since the 1980s.
What is even more encouraging for central bankers is that the core PCE inflation rate fell to 1.5% on a three-month annualized basis, its lowest since late 2020. On a six-month basis it was 1.9% for the second month in a row.
Both of those marks are below the Fed’s 2% target.
While inflation continues to fall, hotter-than-expected economic growth could support an argument for pushing any cuts beyond March.
The advance estimate of fourth quarter US gross domestic product (GDP) released Thursday showed the economy grew at an annualized pace of 3.3% during the period. It blew out consensus forecasts that the number would come in at 2%.
If economic growth continues to surprise to the upside and inflation pops back up, the Fed may be forced to hold rates at current levels for longer. It last raised rates in July, to a 22-year high.
During the December Fed press conference, Fed Chair Jay Powell signaled the central bank had likely reached the peak on rate hikes and would turn attention to rate cuts looking ahead.
He also said that the Fed would want to be “reducing restriction on the economy” well before inflation hits 2%.
Fed officials at that December meeting did predict three cuts this year, without saying when exactly they could happen. He also told Yahoo Finance’s Jennifer Schonberger that the Fed would want to be “reducing restriction on the economy” well before inflation hits 2%.
Fed officials at that December meeting did predict three cuts this year, without saying when exactly they could happen.