New inflation gauge likely keeps Fed on hold for now

On By Littum

Fresh inflation data released Wednesday is likely to keep the Federal Reserve on hold during its next policy meeting this month, although a new reading showed some signs of easing.

On a “core” basis, which strips out the more volatile costs of food and gas, the consumer price index for December rose 0.2% from the previous month, slowing from November’s 0.3% monthly gain. On an annual basis, prices rose 3.2 per cent.

It was the first decline on a core basis after three months of being stuck at 3.3%.

“This latest inflation reading confirms a jump in Fed rates at the January FOMC meeting,” said EY chief economist Gregory Daco.

The new pressure “won’t change expectations for a pause later this month, but it should dampen some of the talk about the Fed potentially raising interest rates,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.

Fed meets next on 28-29 January, and investors almost agree with their view The central bank will leave interest rates unchanged after cutting them by a full percentage point at the end of 2024.

“We’re making progress on inflation, it’s just very slow,” former Federal Reserve economist Claudia Sahm told Yahoo Finance on Wednesday. “Cuts won’t come later this month, but that doesn’t mean they won’t come later this year.”

Read more: How the Fed’s Interest Rate Decision Affects Your Bank Accounts, Loans, Credit Cards and Investments

New York Fed President John Williams said after the CPI release that “while I expect disinflation to progress, it will take time and the process may well be bumpy.”

The economic outlook, he added, “remains very uncertain, particularly around potential tax, trade, immigration and regulatory policies” — a reference to possible changes that could occur as part of the incoming Trump administration.

Plenty of Fed officials in recent weeks have urged caution on future rate cuts.

Indeed, the Fed’s December meeting minutes showed that officials believed inflation could take longer than expected to reach their 2% target, citing stickier-than-expected inflation data since last fall and the risks associated with new policies in Trump 2.0.

They noted that “the likelihood that elevated inflation could be more persistent had increased,” according to the minutes, although they still expected the Fed to bring inflation down to its 2% target “over the next few years.”

Several members of the Fed even said at that meeting that the disinflationary process may have stalled temporarily or noted the risk that it could.