The Federal Reserve's preferred measure of inflation showed continued progress toward the central bank's 2% goal, but likely not enough to trigger a rate cut next month.
The Bureau of Economic Analysis's Personal Consumption Expenditure, or PCE, index for January ticked up 0.3% month-to-month for an annualized increase of 2.5%, according to data released Friday morning. Core PCE, which the Fed tracks more closely because it factors out volatile commodities prices, rose 2.6% on the year.
These readings were in line with Wall Street forecasts. They also represent a slight improvement from the BEA's December readout, which showed the PCE index up 2.6% on an annual basis and core PCE up 2.8%.
Nonetheless, based on recent comments from Fed policymakers, the modest changes are unlikely to induce an interest rate cut during next month's Federal Open Market Committee meeting.
In a Feb. 17 speech, Fed Gov. Christopher Waller said the economic data released up to that point — including
Waller had been among the FOMC members most inclined to lower interest rates. In January, he suggested that the next Fed rate cut could come as early as March but would likely take place before the midway point in the year. He has not ruled out a rate cut before July but said further easing would require clearer indications of economic improvement.
"If this wintertime lull in progress is temporary, as it was last year, then further policy easing will be appropriate," he said. "But until that is clear, I favor holding the policy rate steady."
Gov. Adriana Kugler, in Feb. 20 remarks, said it was appropriate to lower the Fed's benchmark interest rate by a full percentage point last year in response to apparent weaknesses in the labor market. But, she said those concerns have dissipated while fresh worries about inflation have come into the picture.
"The potential net effect of new economic policies also remains highly uncertain and will depend on the breadth, duration, reactions to, and, importantly, specifics of the measures adopted," Kugler said. "Going forward, in considering the appropriate federal funds rate, we will watch these developments closely and continue to carefully assess the incoming data and evolving outlook."
Coming into 2025, most Fed officials were forecasting multiple rate cuts, but two months into the year that sentiment seems to be softening.
In a speech on Thursday, Federal Reserve Bank of Cleveland President Beth Hammack said the Fed's current policy
Hammack noted that for years following the global financial crisis, the neutral rate — the point at which monetary policy neither stimulates nor depresses market demand — was below 2%. Now, she said, the factors that pushed the neutral rate down appear to have reversed. If this is the case, she said, it could be a boon for banks, but not without risks.
"A higher neutral short rate and a steeper yield curve could boost bank profitability and reduce incentives to reach for yield, things which could be positive developments for financial stability. If stretched over an extended period, then there may be little impact on the economy from the move to higher rates," she said. "But if views on rates changed suddenly, the transition path would likely be bumpy and pose short-term financial stability risks."
FOMC participants will write down their new projections for rate cuts, inflation and other economic indicators at their next meeting, which is set for March 18 and 19.
Banks came into the year expecting rates to continue trending down, a development that would boost loan demand and drive mergers and acquisitions as well as capital markets activities, such as initial public offerings. Falling rates would also alleviate the unrealized losses many banks are still carrying on their balance sheets.
Still, banks have been able to position themselves for
Multiple rate cuts could still be in the offing this year, but Fed Vice Chair Philip Jefferson said the committee is in no rush to make that call.
"I believe that, with a strong economy and a solid labor market, we can take our time to assess the incoming data to make any further adjustments to our policy rate," Jefferson said.
