Federal Reserve Holds Interest Rates Steady Amid Inflation Uncertainty
The Federal Reserve left interest rates unchanged, citing uncertainty about stubborn inflation in its ongoing efforts to wrestle down inflation. The Commerce Department reported that the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, rose 0.3% from the prior month and 2.6% on an annual basis in December. The core PCE index, which excludes volatile food and energy prices, increased 0.2% for the month and 2.8% from a year ago, in line with estimates.
Federal Reserve policymakers are focusing on the PCE headline figure, aiming to slow the pace of price increases to their target of 2%. However, they view core data as a better indicator of inflation. Headline PCE ticked higher from an annual rate of 2.4% in November to 2.6% last month, while core PCE has been at 2.8% for three consecutive months.
Wages and salaries were up 0.4% in December compared with the prior month, a slight deceleration after October and November saw wage and salary growth of 0.5%. The personal savings rate as a percentage of disposable income was 3.8% in December, declining from 4.3% in October and 4.1% in November.
Economists, including Jeffrey Roach, chief economist for LPL Financial, predict that despite the stickiness of inflation, the disinflationary trend should reemerge in the spring as services prices are set to moderate. The personal savings rate currently is 3.8%, materially below the 2019 average of 6.7%, putting the consumer in a precarious position if incomes weaken.
The Federal Reserve’s decision to hold interest rates steady comes two days after announcing that it would pause the rate-cutting cycle. Markets are pricing in an 82% probability of policymakers leaving rates unchanged at its next policy meeting in mid-March.