Fed on Hold: New Inflation Data Brings Temporary Relief
The latest Consumer Price Index (CPI) report has provided a temporary reprieve for the Federal Reserve, suggesting that interest rates will remain unchanged at the January policy meeting. Despite some signs of easing, the core CPI still rose 0.2% in December, with annual prices increasing 3.2%. This marks the first decline in core inflation after three months of stagnation at 3.3%.
A Pause, Not a Cut
According to EY chief economist Gregory Daco, this latest reading confirms that the Fed will skip a rate cut at the January FOMC meeting. Morgan Stanley Wealth Management’s Ellen Zentner agrees, stating that while the new print won’t change expectations for a pause, it should curb talks of potential rate hikes.
Fed Officials Urge Caution
Fed officials have been warning of stickier-than-expected inflation data since last fall. The December meeting minutes revealed that officials believe inflation could take longer than anticipated to reach the 2% goal, citing risks from new trade and immigration policies. This caution has led to a reduction in estimated 2025 rate cuts from four to two.
A Gradual Approach
Several Fed officials, including Kansas City Fed president Jeff Schmid and Boston Fed president Susan Collins, are advocating for a gradual approach to policymaking. They believe the economy is nearing a point where it neither needs restriction nor support, and policy should be neutral.
Uncertainty Ahead
While the new numbers bring temporary relief, there is still significant uncertainty ahead. New policies from the Trump administration may affect the outlook, and the Fed remains cautious. As DWS Group head of fixed income George Catrambone notes, “if we don’t see [rate cuts] by Jackson Hole, it’s not coming.”
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